European Gas – Bearish fundamentals but perceived supply risk to limit downside

European gas prices have been firmer than our prior estimates through the injection season, with the market supported by perceived strong supply risk. Indeed, w hilst demand-side fundamentals and aggregate inventory levels have evolved in-line with our expectations, the market has returned to a state of semi-supply anxiety in recent months , supporting value in the near-curve. However, we see limited probability that significant supply loss will tighten the European gas balance sufficiently to jeopardise meeting mandatory storage fill targets and consider injection season contracts overvalued on a pure fundamental basis. However, it may take longer-than-expected for prices to reflect fundamentals, with the re-emergence of the supply risk narrative prompting significant short covering from speculative market participants. With the gas market’s muscle memory still driving crisis era market behaviour the perceived risk-reward of initiating a new short position is likely considered relatively low given the potential for asymmetric upside in a major outage event (and with downside likely constrained by the base of the coal-gas switching trigger around €25/MWh). This dynamic may limit the potential for Sum-24 TTF contracts to fully reflect bearish market fundamentals. We expect Sum-24 to average €31 . 5/MWh. We have set our Win-24 forecast at €44/MWh , our estimate of the forward LPG-gas switching trigger. Taking our two key fundamental assumptions (end of Ukraine transit on 01/01/25 and weather normalisation), the Q1-25 balance alone is 14.9bcm tighter year-on-year. We subsequently see TTF pricing off marginal demand through the season. However, the weather assumption is critical. Any repeat of the weather profiles which have actualised over the past two winters would likely see prices back around €30/MWh.