European Gas Market Update – How Low Can You Go?

The European gas market has started 2024 on a bearish note, b roadly in line with our expectations. Whilst a milder-than-average winter has contributed, we discount a wholly cyclical explanation. Instead, our view is that the European gas market has experienced narrative collapse with the market consensus that TTF was required to price off domestic demand and outcompete developed market LNG buyers until new LNG supply entered the market from 2025 now discounted. In effect, the market has reassessed the price level required to balance the market in the current regime significantly lower. Looking ahead, we see limited potential for a substantial demand recovery, with structural trends keeping consumption in key sectors restrained, despite significantly lower TTF prices on a year-on-year basis. As such, the market will be forced to price for supply-side tightening, with flexible LNG demand in EM markets critical for price formation. We find significant potential for flexible demand creation within the Indian market between $7-9/MMBtu – keeping TTF low through the injection season. The future status of Ukrainian gas transit is becoming a critical issue for the gas market given the likely uplift uncertainty is providing Cal-25 pricing. Given key sources of flexibility for Sum-24 (most notably Norwegian production deferrals and overspill storage), require temporal arbitrage with Sum-24 pricing at or below Cal-25, market expectations and subsequent pricing for Cal-25 will likely be the key factor deciding the floor for Sum-24. We maintain our forecast for Sum-24, with the market coming into line with our view that the European gas market will require demand creation and supply-side reductions to balance. We mark Q1-24 to market (€30/MWh to €27/MWh) with downside eventualising quicker than our prior expectations. For now , we maintain our Win-24 forecast (€36/MWh) on the assumption that clarity on the continuation of Ukrainian transit will be in short supply, supporting prices .