EU rules risk overheating a red-hot gas market

Ron Bousso

European policymakers worried about energy prices have shot themselves in the foot - twice - as two rules aimed at managing the region's gas market run the risk of instead overheating it over the summer months when stocks should be replenished. Faced with the supply disruption caused by Russia's invasion of Ukraine, the European Union introduced binding targets to ensure gas storage reached 90% of capacity every November. The rules also include intermediate targets for February, May, July and September.

While the need to secure supplies ahead of winter is clear, the target has effectively put buyers at a disadvantage, as it tells sellers their filling requirements.

The European gas market is already stretched.

European gas storage was at 49% of capacity on February 10, below last year's 67% and the 10-year average of 51% for the same period. The seasonal draw has been bigger than in the previous two winters due to colder weather, lower wind speeds and the termination of imports through the last major gas pipeline linking Europe to Russia at the start of the year.

Refilling storage during the summer months, when historically demand and prices were relatively low, has become more complex - and expensive - since Europe sharply reduced its imports of Russian gas in 2022 in response to the Ukraine war.

In addition to importing pipeline gas from Norway and North Africa, Europe was also forced to depend much more heavily on liquefied natural gas (LNG), which means competing with overseas markets for volumes, mostly from the United States.

Benchmark Dutch TTF gas prices are at a two-year high of 58 euros per megawatt hour (MWh), around three times their pre-invasion level, though well below the 2022 record of 311 euro per MWh.

This is not the pricing environment Europe would choose when it is trying to source excess volumes.

Unintended consequences

The combination of a tightening global LNG market and well-known European filling targets created a worrying anomaly in the region's gas prices in recent months.

In November, Benchmark TTF natural gas prices for the 2025 summer months shot up above winter 2026 prices. Traders thus have little incentive to store gas ahead of winter 2026 because they will lose money.

To encourage operators to store, prices need to be in a market structure known as contango, where future prices are higher than prompt prices, meaning gas can be stored at lower prices today to be sold at higher prices in the future. The distortion in the summer-winter spread worsened after THE, Germany's gas market trading hub, said on January 21 that it was in talks with the economy ministry on a proposal for the government to subsidise the replenishment of gas storage sites if the market remained in backwardation, i.e., summer 2025 prices remained above winter 2026 prices.

The intention was clear: the German regulator hoped buyers would respond to the government's assurances by rebuilding these critical gas inventories over the summer.

But instead of allaying concerns, the German proposal appears to have made things worse, as the summer price premium has widened in recent weeks. This likely reflects the speculators' realisation that they could make easy profits by buying the contracts.

Self-inflicted wound

The rapid drop in European gas storage levels has created a significant problem for European governments and the region's energy consumers.

Europe is already drawing large volumes of LNG at elevated prices. Imports to the EU and Britain in January were the highest since December 2023 at 9.8 million metric tons, with the United States accounting for 57% of the total volume, according to Kpler data.

Competition for gas supplies is likely to become more fierce moving forward, as new U.S. LNG export facilities have not increased capacity as quicky as expected and demand continues to rise in Asia, Egypt and elsewhere.

Reaching European storage targets may therefore get still more expensive.

How expensive? Assuming gas storage capacity levels fall to around 35% by the end of winter, meeting the target of 90% would cost around 36 billion euros at current TTF gas prices, according to Reuters calculations.

The EU may extend the filling target before its scheduled expiry in December 2025, and some reports suggest European governments are also considering relaxing the rules, which would most likely ease pressure on summer prices.

Even then, it is tough to predict exactly when or by how much the targets could change, creating more uncertainty–the last thing the energy market needs.

(The author is a Reuters energy columnist)