Benchmark British wholesale gas prices will stay elevated for the rest of 2018, as operators across Europe race to replenish inventories that have plunged to their lowest in at least five years.
Prices soared to record highs in March as freezing temperatures lifted gas demand to its highest level since 2010, drawing down stocks across Europe and exacerbating tightness from outages and reduced liquefied natural gas (LNG) imports.
Britain, whose gas prices are a benchmark for other European hubs, relies on reserves to manage its winter demand. It will need to refill at record pace this summer, at a time when European nations are also chasing extra supplies.
Adding to Britain's headache, what was its largest storage site, Rough, has now closed, removing an extra cushion to meet winter demand that once had capacity to inject gas into the national network for 90 consecutive days if needed.
Northwest European gas storage volumes are expected to start the summer season at about 6 billion cubic metres (bcm), the lowest level since at least 2013, when Thomson Reuters Eikon data for European inventories began and stocks stood at 10 bcm.
"That does not mean that gas prices will spike but it's unlikely that gas prices will drop - at least for the very beginning of the spring/summer season," said Giacomo Masato, research analyst at brokerage Marex Spectron.
Unseasonable cold weather in Britain is expected to continue to the end of March, pushing inventories lower still. British stocks now stand at 300 million cubic metres, compared to 1.1 bcm at the same point a year ago.
"If we don't see injection in April, the lag is going to be so acute going through summer, it has to be a flashing risk for next winter," Thomson Reuters gas analyst Oliver Sanderson said.
"The impact of acute storage depletion will be felt for some time to come. Lower inventories in June and July could be bullish, lifting the winter 2018 and August price. The European gas system is also acutely sensitive to unplanned outages," he said.
Summer 2018 gas prices are now about 45 pence per therm, having risen about 12 percent since early February, while the winter 2018 contract is about 53 per therm.
Investment bank Goldman Sachs has raised its forecasts for British gas. It sees second quarter prices at $6/million British thermal units (mmbtu), or 42.6 pence per therm, 9 percent higher than its previous estimate. It sees full-year prices up 15 percent from its previous estimate at $6.13/mmbtu, or 43.5 per therm.
BMI Research sees full-year prices averaging 45.0 pence per therm, up from a previous forecast of 43.0 per therm.
Trevor Sikorski, analyst at consultancy Energy Aspects, said Europe now needed to find an extra 8-10 bcm by October to replenish stocks. "That will take quite a lot of additional LNG, and if not, increased nomination from Russia," he said.
Last year, monthly European Union gas consumption was around 28-40 bcm from April to the end of September, according to the EU's statistics office Eurostat.
Adding to upside pressure on prices, Russian gas giant Gazprom might not be able to reroute sufficient flows to Europe after it began unwinding its transit contract with Ukraine, analysts say.
Tension between Moscow and London, after the poisoning of a former double agent living in Britain, has also raised questions about British energy security.
Although Russian gas accounts for less than 1 percent of British demand, Britain relies heavily on supplies from the Netherlands, which may itself have to increase Russian imports as the Dutch government reduces output from a major gas field.
The Dutch government says it wants to cut production to 12 bcm a year at its Groningen field "as quickly as possible", from more than 21 bcm now. The initiative aims to reduce the risk of tremors caused by the production process.
Britain could turn to its other main supplier, Norway, but it will face competition for the gas from elsewhere in Europe.
The amount of LNG Britain receives over the summer is also uncertain as much depends on the development of Asian spot LNG premiums over European gas hubs.
"There are geopolitical issues, storage is obviously a concern, uncertainty around Groningen, a lack of LNG although this might change and French nuclear is still a concern for me this winter," said Wayne Bryan, analyst at Alfa Energy.