European gas prices surge: cold weather and low inventories drive volatility

European gas prices extended this week’s rally past 25% – the biggest such jump in over two years – with a change in sentiment taking hold as traders rush to cover short positions amid bouts of unusually cold weather.

Benchmark futures broke a months-long trend of muted trading within a narrow range, hitting the highest levels since July. The rally marks a significant shift in the market after stronger heating demand collided with renewed geopolitical risks.

“Sentiment has completely turned – you could almost call it a perfect storm,” said Arne Lohmann Rasmussen, chief analyst at Global Risk Management.

Prices are still far from the records seen during the 2022 energy crisis, yet the sharp rally underscores how vulnerable Europe’s gas market remains to prolonged jumps in demand and volatility. Fuel reserves were initially viewed as sufficient at the start of the heating season – when funds turned the most bearish on European gas in almost six years – but worries about the region’s supply balance have increased in the past few weeks.

Speculators who had bet on a weaker market started to buy futures to cover their positions, adding momentum to the rally. While the latest bout of volatility is an opportunity for traders to profit from abrupt swings, it’s typically detrimental for industry and consumers.

Meanwhile, gas inventories are less than 52% full, down from a five-year seasonal average of about 67%. Hefty withdrawals from storage sites have put stockpiling risks for next summer in focus, said Lohmann Rasmussen.

The rally highlights a deeper structural shift. Europe has lost much of the flexibility it once relied on to absorb supply shocks, leaving storage as one of its few remaining buffers as it procures liquefied natural gas from across the globe. Yet building up inventories often relies on summer gas contracts being cheaper than those for the following winter, a price structure that flipped this week and also posed major concerns a year ago.

While Europe has managed to attract plentiful seaborne supply this winter and Norwegian pipeline flows have been relatively steady, a plunge in temperatures boosted demand for the fuel in recent weeks, which so far had been muted. The region needs to maintain some price support in order to compete for cargoes with other buyers.

Geopolitical risks and speculative flows are amplifying the move, said James Waddell, head of European gas and global LNG at Energy Aspects Ltd. Cold weather in Europe and Asia, low stocks and renewed tensions involving Iran have lifted risk premiums, while traders have been forced to unwind short positions built on expectations of a swift return of Russian gas, he said.

A storm in France earlier this week also forced some nuclear facilities to go offline, further increasing reliance on gas.

The price shifts serve as a reminder of the market’s inherent volatility, said Sadnan Ali, an oil and gas analyst at HSBC Holdings Plc. He said the region’s gas benchmark remains highly sensitive to sudden weather changes, unpredictable supply outages and shifts in global demand, with recent price action reflecting short-term tightness being increasingly priced in.

Dutch front-month futures, Europe’s gas benchmark, traded 7.7% higher at €35.71 a megawatt-hour by 1:26 p.m. in Amsterdam. The weekly gain is set to be the largest since October 2023.