Gas prices have dropped 8% since the beginning of this year due to the mild weather reducing gas demand. The warm winter has left European gas markets with a completely different outlook compared to last year.
At end-January 2013 European storage reserves were around 4 percentage points lower. The extreme cold spell in February/March depleted stocks even more and pushed up prompt prices. Forward prices were lifted by expectations of large injection volumes over the summer. By end-March gas storage sites in many countries were nearly depleted.
This year, gas demand is muted, particularly in the residential segment. In January, total UK gas use was 16% lower than last year. In the Netherlands, household gas use dropped by 24% compared to 2013. Italian gas demand fell by 1 billion cubic metres year-on-year in January, mainly due to a 14% drop in household consumption. With lower demand, draw on storage is also down. The relative fullness of storage has led to the expectation that a much smaller amount of gas will be required to refill storage over the summer.
This week marks the traditional seasonal peak for gas demand under normal conditions. However, continued mild temperatures and strong supply from most major sources pressure gas prices. The drop in prices is limited by the increased import dependency and risk of going short during peak season. Summer prices are supported by expectations of stronger power sector gas use.
UK gas price in pence/therm (Data source: Reuters)
UK gas demand in million cubic metres/day (Data source: Reuters)