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Energy Security Trumps Energy Transition: Mild Weather a Relief for Europe

By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia

Energy Security Trumps Energy Transition: Mild Weather a Relief for Europe
 
Harry Altham
Energy Analyst, EMEA & Asia

Crude markets have continued their volatile start to the year, with Brent and WTI rising by 2% after three days that saw Brent lose as much as $7 due to rising OPEC+ production during December and heightened concerns surrounding the death toll in China amid a surge of COVID-19 infections. The NY Harbor ULSD crack to NYMEX WTI has widened by 0.6% this morning due to an outage on the Colonial oil pipeline in Virginia. The line has a capacity of 600k bbd, which is comparable to the Keystone pipeline that reopened on Tuesday after a three-week outage. 

Europe faring well after mild spell
Ahead of this winter, the European Union had braced itself for the possibility of the La Niña year as having a significant impact on temperatures; a study by the Met Office presented a positively skewed distribution with a 15% chance of significantly colder than average weather between November and March (inclusive). When the thermometer plummeted in December, Dutch TTF spot prices touched €150/MWh; though this was a two-month high, the rise had been limited by mild conditions throughout October and November. Since mid-December, temperatures have risen to seasonal records across Europe; temperatures in parts of Spain exceeded the summer average high, while the snow-melt in the Alps has shuttered a large number of ski resorts. January temperature records have been broken in as many as eight countries. 
image 59867
Source: Met Office 
As a result, between 23rd December and 2nd January, European gas storage utilisation rose by 0.6%. Though such a rise has precedent over the Christmas period (2019 and 2021), the rise has never been this large or lasted as long; gas consumption began to slow as early as 15th December – when milder temperatures arrived across much of Europe. Only in January 2020 has Europe’s gas storage utilisation been higher on 5th January (86.4% against 83.4%), and that year saw gas storage utilisation remain above 50% at winter’s end (although two COVID-affected weeks and a mild end to March will have impacted the data). 
image 59871
E.U. Gas Storage Seasonality Graph. Source: Bloomberg
The European Union’s directive to reduce gas consumption can be said to be having a considerable impact amid the mild weather; Germany has turned to alternatives such as diesel, coal and renewables to a sufficient degree that saw it boost its storage utilisation by the most of any country in Europe over the Christmas period (3.5%, with tanks continuing to rise as of 5th January). This is particularly impressive given Germany’s critical role as an energy provider to France; it exported an all-time record 15.3TWh to France last year amid ongoing issues with France’s ageing nuclear reactors.

Over the month of January, temperatures look set to remain above average throughout the month due to a strong low pressure system that is inhibiting the breakout of cold fronts from the Arctic. Though we believe gas storage will be depleted through the month as industrial activity recommences, we believe the depletion rate will be much lower than the five-year seasonal average due to the aforementioned policy initiatives by the European Union. Should the low pressure system hold out, we believe Dutch TTF prices could fall beneath €55/MWh, although a simultaneous period of strength in middle distillate markets risks spurring resurgent natural gas demand, that could jeopardise E.U. policy objectives as well as the welcome price relief. 

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