Germany Weighs Market Incentives to Boost Record Low Gas Storage Level

Germany is contemplating expanding a crucial market incentive to motivate traders to increase gas storage levels prior to the winter season, according to a government source who spoke to Reuters on Wednesday. Presently, German gas sites are only 56% full, a historically low figure as of mid-September, according to Gas Infrastructure Europe data.

This is the lowest storage level in at least fifteen years, driven by a surge in natural gas prices amid the Middle East crisis, which has exacerbated a backwardation structure and dissuaded holding supply for future deliveries. Backwardation refers to the market condition where near-term contracts trade at higher prices than those further out in time, signaling apprehensions about immediate supply.

Consequently, Germany risks facing a gas shortage this winter if the weather proves colder than previous years, as highlighted by the country's gas storage association, INES, last week. To address this issue, the German government is contemplating utilizing the existing market tool, the autumn tender for Long Term Options (LTOs), on a broader scale.

The tender is expected to receive an additional volume of gas, though the specific amount has yet to be determined. Instead of directly purchasing gas, the government has agreed with state-owned energy firms Uniper and SEFE that they would inject additional gas into their storage facilities. However, the INES Association has cautioned that refilling efforts have "significantly lagged behind the required pace this year" and that the "window for sufficient refill is rapidly closing."

INES Managing Director Sebastian Heinermann stated that while reaching a storage level of approximately 77% remains technically feasible, merely having storage capacities booked is insufficient. "Filling storage facilities must be economically viable if market participants are to actually execute it," he added.