European traders are withdrawing natural gas from storage sites at the fastest pace since 2012 as oil’s collapse to a five-year low prompts buyers to delay imports of Russian fuel to take advantage of lower prices next year.
Inventories at storage facilities in the 28 European Union nations fell 9.7 percent since Oct. 1, compared with an 8 percent drop in the same period of 2013, according to data from Gas Infrastructure Europe, a lobby group based in Brussels. Russian gas flows to Europe declined by 25 percent from a year earlier last month, state-run exporter OAO Gazprom said Dec. 1.
Russia meets about 30 percent of Europe’s gas demand, mostly under long-term contracts linked to oil. Tumbling crude prices will start to filter through gas contracts in the first quarter of next year as most deals include a six to nine month lag, according to Citigroup Inc. Crude fell to a five-year low as U.S. production expanded amid slowing global demand.
“European buyers are using the flexibility of their contracts with Gazprom to take minimum volumes, and that’s part of the reason why we see higher storage withdrawals than last year,” Moses Rahnama, an analyst at London-based consultants Energy Aspects Ltd., said by e-mail Dec. 12. “Given the warm weather, Europe is withdrawing much more than it should.”
The U.K. and Germany, Europe’s biggest gas-consuming nations, are headed for their mildest year on record, damping demand for the fuel used in heating. Gas usage in eight EU countries accounting for 63 percent of consumption will decline 11 percent this year, Societe Generale SA estimates.
EU nations had 68.9 billion cubic meters (2.4 trillion cubic feet) of gas in storage as of yesterday, down from 76.3 billion when the heating season started Oct. 1, GIE data showed. Gazprom shipped 10.5 billion cubic meters of the fuel to Europe in November, Gazprom said Dec. 1. That’s down from about 14 billion cubic meters in 2013.
Brent crude prices fell more than 40 percent since reaching this year’s high in June on the ICE Futures Europe exchange. Prices collapsed about 20 percent since Nov. 26, the day before OPEC agreed to leave its production limit unchanged. If oil keeps falling, it will “exert downward pressure” on long-term gas contracts for 2015, the International Center for Natural Gas Information, Cedigaz, said on its website Dec. 13.
“The weakness in oil prices will filter through to end-user discounts from the first quarter,” Ed Morse, head of commodities research at Citigroup, said in a Dec. 1 report. “This incentivizes consumers to use storage gas in the prompt and defer Russian purchases until later in the year, in order to benefit from lower contract prices.”
Traders are already betting on lower prices on European hubs. The most-active options on the ICE Futures Europe exchange gave owners the right to sell gas in the U.K., Europe’s biggest market, below current prices. The so-called put options were to sell March futures at 50 pence a therm ($7.83 a million British thermal units), or 6.2 percent below the market level, and April at 45 pence a therm. April futures were trading at 51.8 pence a therm.
While utilities may be delaying purchases of Russian gas to take advantage of cheaper prices, Gazprom is limiting volumes to “avoid a collapse of the gas price,” Thierry Bros, an analyst at Societe Generale in Paris, said by e-mail Dec. 8. Front-month gas prices in the U.K., a European benchmark, fell 22 percent this year as warmer-than-usual weather cut demand.
German gas under long-term contracts costs about the same as spot fuel on the NetConnect Germany hub, according to Bloomberg’s gas contract calculator using the Bafa proxy for 2014. Hub prices were as much as 10 euros ($12) a megawatt-hour cheaper earlier this year.
“In recent years buyers have minimized their take from the long-term contracts due to the price differential,” Andrew Morris, an Oxford, England-based analyst at Poeyry Oyj, said by e-mail Dec. 10. “I do expect buyers to take more than this with the lower oil prices and this is why these prices will be price setting in the summer.”