Europe Gas Futures May Hit €20/MWh Amid High Inventory

Key Takeaway

• European natural gas futures may drop to €20/MWh due to high hedge fund positions and elevated inventory levels.
• Global LNG prices face volatility from summer weather, potential hurricanes, and resumed supply flows, impacting Europe’s gas market.
• Political risks in Europe are priced in but contained; ECB's recent rate cut signals cautious monetary easing amid persistent inflation.

Potential Price Drop

European natural gas futures, currently hovering around €50 per megawatt-hour, may potentially drop toward €20, a key support level prior to 2021. Bloomberg Intelligence analysis suggests that the recent low of €22.32/MWh in February hints at a possible return to this lower range. This potential downturn is driven by several factors, including high net-long positions by hedge funds in Dutch TTF natural gas futures, which have reached their highest level in over two years. This surge in speculative interest raises concerns about potential liquidation, which could push prices below €20 per megawatt-hour.

Mike McGlone and Eddie van der Walt from Bloomberg Intelligence highlight the global competition for LNG cargoes from countries like India, Argentina, and Japan, which has pushed prices higher. However, Europe faces high inventory levels, with facilities already more than 70% full early in the refilling period. In 20 years of data, only the pandemic-affected year of 2020 saw more gas in storage at this point of the year. This situation puts TTF contracts for autumn delivery at particular risk.

Global LNG Market Dynamics

Global prices of liquefied natural gas (LNG) may find some support as traders shift focus to summer weather and potential hurricanes. Gas benchmarks in both Europe and Asia have slipped by nearly 10% over the past week, partly due to some supply fixes. Norwegian flows resumed following an unplanned outage, and LNG outages in Brunei and Australia were recently resolved. However, the outlook for hotter weather in China and Japan, the two biggest LNG importers, could increase gas needs in an early start to summer. This risks taking more fuel away from Europe, where LNG deliveries are at roughly the lowest level since early 2022.

The European gas futures market is already showing signs of these fears materializing. The premium of the 1Q 2025 contract over the 3Q 2024 contract has been shrinking, indicating a tightening market. With an active hurricane season threatening disruptions from the top LNG exporter, the US, this summer is at risk of greater volatility and higher prices.

Political Risks in Europe

Traders are pricing in a broad political risk premium after the European Parliament’s election results showed far-right parties gaining. However, historical responses from market vigilantes in Europe suggest that risks can be contained for now. For example, when Giorgia Meloni won in Italy in 2022, there were concerns about fiscal restraint and right-wing rule. Italian yields shot up that year due to these risks and the ECB tightening policy. However, fears dissipated as Meloni respected EU financial laws, and the government later watered down a bank windfall tax after markets were spooked.

Another example is the UK budget announcement by Liz Truss in 2022, which led to a bond market meltdown and forced the Bank of England to intervene. Truss’s plans focused on growing the economy at a time when the BOE was raising interest rates aggressively to tackle inflation. The plan was introduced without an independent forecast from the Office for Budget Responsibility, leading to market turmoil.

Currently, European central banks are looking to ease monetary policy in the face of sticky inflation and improving economies. The ECB recently cut interest rates for the first time in this cycle, albeit hawkishly, as services and wage price pressures persist. The ECB is largely expected to keep rates on hold this summer, with a 50% chance of a September cut. The political dust is expected to settle by then, although the complexity of European politics and their longer-term impact on markets remain.

Street Views

• Mike McGlone and Eddie van der Walt, Bloomberg Intelligence (Bearish on European natural gas market):

  "The focus recently has been on the global picture, where competition for LNG cargoes from India, Argentina and Japan has pushed prices higher. Yet Europe faces high inventory levels, with facilities already more than 70% full early in the refilling period... putting TTF contracts for autumn delivery at particular risk."