Traders To Blame As European Gas Markets Descend Into Chaos 

By Irina Slav
27June 2023

• EU gas markets have seen a sudden bout of volatility over the last 10 days.
• Bloomberg: the gas trading market in Europe is seeing an influx of traders who do not normally play on that market.
• The closure of the Groningen gas field and supply constraints in Norway have sparked supply security concerns.

Earlier this month, natural gas prices in Europe rose twofold in the space of 10 days, with a single trading day seeing a jump of 27% two weeks ago. On June 15, prices jumped by 30%. A day later, they dropped almost as sharply as they had risen, shedding over 20%.

All this happened before the latest events in Russia that rattled commodity markets. And it will be happening again. Because traders are crowding the natural gas space, eager to make some money like others did last year. Volatility has come back to natural gas markets.

Bloomberg reported this week that the gas trading market in Europe is seeing an influx of traders who do not normally play on that market but were tempted by the record profits gas traders made last year.

At the time, gas prices in Europe soared to record heights after the EU bombarded Russia with sanctions, and Russia responded by decimating flows along the Nord Stream pipeline. Europe rushed to buy liquefied natural gas on the spot market, promptly pushing prices to levels never before seen. Traders made millions.

“Some people thought they could make a lot of money given where prices had been, but there was an exaggeration of what this really meant for the gas market,” Citi’s commodity chief Ed Morse told Bloomberg. “Natural gas markets have proven to be a trap for both experienced and inexperienced traders,” he also said.

In addition to the trap that is the gas market, there appears to be actual concern among traders about the sufficiency of gas supply for Europe. Norway has been going through some extended outages due to field maintenance, and the Netherlands has reiterated it will close the Groningen gas field. Both of these suggest doubts over the security of supply going forward.

“Reports of Groningen closing down adds to a host of other news that are bullish for gas prices,” ICIS analyst Tom Marzec-Manser told the Financial Times. “But the price swings are an indication that there is still a lot of uncertainty over Europe’s gas outlook, and market participants remain on the edge,” Marzec-Manser also said.

The fundamental problem, however, is not the outages in Norway and the shutdown of Groningen. As last year proved, there is plenty of LNG to go around in Europe, for the right price. This year there will be LNG too. But there will not be space in Europe’s gas storage caverns because they are already rather full of gas from last year that was bought at exorbitant prices.

Earlier this month, Reuters’ John Kemp reported that Europe’s gas storage was at 48% above the ten-year seasonal average, noting that additions to this storage were slowing down because of low prices that encouraged more immediate consumption.

Despite the slower rate of additions, Kemp also pointed out, capacity should be full earlier than last year, and this means drawdowns will need to begin earlier than last year. This is when prices may whipsaw again: when both Europe and Asia prepare to enter winter heating season.

This is also why volatility in gas prices remains so high. It’s not because nobody knows if there will be enough gas. It’s because if last year was any indication, there will always be enough gas—for those who can afford it.

There are plenty of speculators eager to grab the opportunity to make a quick buck before Europe finally realizes it might be wise to bet on long-term supply rather than splurging on spot market cargos. And there is always the risk of an unforeseen event or even a foreseen one—such as Ukraine’s warning that it might shut down gas transit from Russia when its contract with Gazprom expires next year.

By Irina Slav for Oilprice.com