LONDON - Europe’s gas storage is refilling much more slowly than usual as the drop in prices encourages more consumption by industrial users and power generators while diverting liquefied natural gas (LNG) cargoes to Asia.

Gas inventories across the European Union and the United Kingdom were +261 Terawatt-hours (TWh) above the prior 10-year seasonal average on June 6, a surplus of +48% or 1.88 standard deviations.

The surplus has narrowed from +282 TWh (+80% or +2.41 standard deviations) at the end of the traditional winter drawdown season on March 31 (“Aggregated gas storage inventory”, Gas Infrastructure Europe, June 8).

Storage sites reached two-thirds full on May 24, which was 57 days earlier than the average since 2011, but that reflected the record volume of gas already in store at the end of the winter.

Since the start of the refill season on April 1, inventories have accumulated much more slowly than normal for the time of year, in contrast to the record speed of the refill this time last year.

Total inventories have risen by +165 TWh in 2023, the smallest seasonal addition since 2021 and before that 2015, compared with a prior 10-year average increase of +186 TWh.

Over the seven days ending on June 6, the most recent data available, stocks increased by an average of just 2.60 TWh per day, the slowest accumulation for at least 11 years.

Inventories are still on course to reach 1,225 TWh by the end of the refill season, with a probable range from 1,044 TWh to 1,323 TWh.

Most of these storage trajectories are physically impossible since maximum storage capacity is estimated at only 1,138 TWh.

In effect, storage will be full much earlier than normal, and the winter drawdown will have to start earlier than usual.

But projected end-of-summer storage has already fallen from 1,246 TWh (with a range from 1,102 to 1,413 TWh) on April 1.

Inventories have responded to lower prices, with front-month futures prices down by more than 90% from its peak in August 2022.

After adjusting for inflation, front-month prices are in the 52nd percentile for all months since 2010, almost exactly in line with the long-term average.

Cheaper prices are encouraging more gas-fired generation (at the expense of coal) and some heavy industrial users to restart plants idled during the price crisis in 2022.

Lower prices in Europe are also diverting more LNG cargoes to price-sensitive customers in South and East Asia for power generation.

With inventories accumulating much more slowly, the market adjustment appears well underway already.

Front-month prices appear to have stabilised around 25 euros ($26.92) per megawatt-hour for the time being, and the summer-winter calendar spread between July 2023 and January 2024 has also recovered slightly to a contango of around 17 euros from a recent low of 24 euros in late May.

Stabilising front-month prices and a slightly less-weak spread imply traders anticipate the drop in prices has been enough to prevent storage space running out before the middle of October.

John Kemp is a Reuters market analyst. The views expressed are his own ($1 = 0.9289 euros)

(Writing by John Kemp; Editing by Susan Fenton)