(Bloomberg) -- Europe’s gas traders were expecting this winter to see the last of hair-trigger prices, but in recent weeks it’s become clear that the following heating season could be even worse.
Industrial demand, including in Germany, remains sluggish, while geopolitical risks in the Middle East have eased, depressing oil prices. Still, European gas remains elevated, with traders focusing on a swath of risks that could make it more challenging to build supplies next year.
The possibility of a colder winter along with delays to liquefied natural gas projects, just as competition for the fuel intensifies, has undermined confidence that 2025 will herald the demise of market volatility. The end of a transit deal between Kyiv and Moscow, which has kept Russian gas flowing to the region, could strain supply further.
The combination of those factors “have raised risks that the gas supply outlook for Europe may not be any better in 2025 compared to 2024, but in fact could be worse,” according to Kim Fustier, head of European oil & gas research at HSBC Holdings Plc.
Withdrawals have already started from Europe’s vast underground gas storage facilities, which could be depleted by the end of this winter.
The industry consensus is that the region will arrive in March with inventories 40% to 45% full, compared with 58.5% last winter, says HSBC’s Fustier. Citigroup Inc. strategist Anthony Yuen said a halt to Russian pipeline flows through Ukraine could alone result in Europe’s stocks ending the winter only about 30% full.
That scenario has already started playing out in prices for next year, with contracts for the summer season surging this week above those for the winter of 2025-26. And the cost of insuring against spikes or troughs is still hovering near the highest since the start of the heating season, a sign investors are betting on further price increases.
At the same time, Asia has been boosting LNG purchases as extreme heat waves become more frequent, and top-importer China has added storage capacity, intensifying competition with Europe. Brazil and Egypt have also increased purchases of the super-chilled fuel to address energy shortages.
To be sure, some analysts don’t share concerns that this will result in a tight market next summer.
“We expect higher LNG supply from the US in particular to help offset higher Asia and Middle East buying, and keep balances somewhat in line with what we saw this past summer,” said Samantha Dart, head of natural gas research at Goldman Sachs Group Inc.
Much will depend on how cold this winter is. Temperatures across most of northwest Europe are forecast to drop by mid-November, after a mild start to the heating season.
That could boost fuel consumption, while demand for gas for power could increase too.
“Very strong hydro power generation, especially in southern Europe, earlier this year should revert back closer to historical averages, so that the year-on-year drop in hydro power generation would require more power supply from other sources,” Citi’s Yuen said. “This includes natural gas.”
--With assistance from Anna Shiryaevskaya.
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