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Wintry weather arriving in Europe boosts power and gas prices

[FRANKFURT] Colder-than-normal weather settling into Europe over the next week is poised give the second boost to natural gas and power markets since the start of the heating season.

The chill is raising hopes that after record warmth in 2019 this winter reverts closer to the 30-year average. Energy prices are rising on the expectation that coronavirus restrictions may boost energy demand for heating.

The weather will also test a theory new to the market this year, that power and gas demand will rise more quickly in cold weather than in previous years. The reasoning is that those stuck working at home will dial up heat that would otherwise switched down during their hours in the office.

"Widespread seasonal and below-normal temperatures will result in overall energy demand running well above the 10-year normal," Matthew Dross, a meteorologist at Maxar said in a report. The north and west of Europe will continue to be cold throughout December, he said.

If the home heating theory holds and a more normal winter sets in, traders expect they will have to draw down more of the gas inventories they built up over the summer. Gas storage tanks are higher-than-usual for this time of year but a notch below last year's levels.

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Low levels of generation from wind turbines are also supporting electricity prices. There's potential for wind speeds to drop in Britain and Germany next week, according to The Weather Co. That could lift prices in Germany as well as neighboring countries where cross-border flows are reduced.

Electricity demand in Germany, Europe's biggest market, was 2 per cent below the five-year average in November and up by 1.3 gigawatts year on year, according to S&P Global Platts.

"Germany gets tight fairly quickly once wind generation ebbs away," said Sabrina Kernbichler, power analyst at S&P Global Platts.

In the UK, where power demand is set to be 5 per cent lower than in 2019, the electricity grid operator has revised up its expectations for demand for the rest of winter.

Most of the impact of increased heating demand will be seen in the gas market. Prices have increased almost 4 per cent in the last two weeks but are still languishing below the five-year average for this time of year. Stiffer demand has the potential to draw in more cargoes of liquefied natural gas.

Cold weather "will likely require higher withdrawals from storage to balance the market," said Carlos Torres Diaz, head of gas and power research at Rystad Energy AS. "If temperatures remain below normal for most of December, more LNG could be required." With the pandemic in the mix this year, an extended period of cold weather has the potential to lift gas and power demand more than usual with more people at home, according to Glenn Rickson, head of European power analysis, S&P Global Platts.

Europe may also have to compete with North Asia for LNG, where prices are gaining amid colder weather forecasts and supply disruptions.

Climate change Winters are getting warmer. For most of Europe, the closest to a normal winter was last seen in 2016-17.

By January, the warming trend may resume. Weather models point to above average temperatures at the start of next year and into February.

"The weather models consensus is for a bearish January and a very bearish February," said Giacomo Masato, an analyst at Marex Spectron Group Ltd. "There is no bullish scenario for the first quarter right now." On average, normal to slightly above average temperatures are expected for north west Europe throughout the rest of winter, according to Richard Adams, a meteorologist at The Weather Co. Well-above temperatures are seen for the eastern part of the continent and into Scandinavia.

One event might change the scenario for the first months of next year. Traders and analysts are closely watching the stratospheric polar vortex, a phenomenon that is only observed during winter and can potentially generate colder weather. It was last observed in 2019, also in conjunction with La Nina like this year, and it could change the dynamics of the season.

"I have some reservations as to whether this bearish outlook will verify," said Mr Masato. "There is a possibility, albeit slim, that we may see the polar vortex weakening in January, which could in turn result in declining temperatures."

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