Gas futures plunge as Germany fills its deposits

Natural gas prices in Europe fell by the most in months yesterday after Germany said its reserves of the fossil fuel were being filled faster than expected.

Thomas Osborne
Thomas Osborne
29 August 2022 Monday 17:43
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Gas futures plunge as Germany fills its deposits

Natural gas prices in Europe fell by the most in months yesterday after Germany said its reserves of the fossil fuel were being filled faster than expected.

Specifically, natural gas futures in Germany plummeted more than 20% yesterday, reducing the vertiginous rise of recent weeks, to finish close to 283.97 euros per megawatt-hour. Gas storages in Germany are expected to be 85% full next month, above the October target, Economy Minister Robert Habeck said on Sunday.

Speculative elements also come into play in this drop in gas futures. “All market participants are somewhat stunned by the rapid developments we have seen in recent trading days,” said Bo Palmgren, chief operating officer at MFT Energy, a Danish operator in Aarhus. "We hope that we will soon see more liquidity in the market and stable prices." "In our view, gas prices in Europe have overshot fundamentals, due to a combination of supply and demand concerns and exceptionally tight liquidity in the market," Goldman Sachs said in a report.

Prices are probably also falling on profit-taking, after rising for six consecutive weeks (they have more than tripled this summer). “The closer we get to fully filling gas reserves – on August 27, EU reserves were at 79% – the more the bullish momentum will be questioned,” EnergyScan's market analysis unit said. In the short term, this drop in futures discounts the next drop in temperatures in Eastern Europe and in some areas of the Iberian Peninsula, which will help countries spend less gas, since less energy will be needed for refrigeration.

However, even with full warehouses, Germany risks not being able to make it through the winter if Russia cuts off flows. “The entire storage narrative (not just in Germany) completely misses the simple mathematical fact that storage typically accounts for only 20-25% of annual gas consumption and consumption peaks in the winter months. If there are no more flows, the storage will not serve for much longer, ”said Bruegel analyst Silvia Merler.

In another sign of how Germany's energy crisis is far from resolved, German energy giant Uniper tried yesterday to extend its line of credit with the government to ensure its survival. In fact, although German companies have been forced to replenish gas reserves, Habeck's comments indicate that “this purchase will subside from now on”. In the medium and long term, the key lies in the flows, in particular those from the Nord Stream gas pipeline to Germany from Russia. Who has the tap key.