European gas pricing for demand destruction into 2023

Evolving expectations regarding the increase in Russian gas exports likely in 2022 have resulted in a complete repricing of the TTF curve in recent weeks. Whilst spot prices a bove €120/MWh are grabbing the headlines, the bigger story is the move across longer dated contracts. TTF for the balance of 2022 is currently tr ading around €8 5 /MWh, after trending in a €45-55/MWh range for several months. 2023 prices have also risen meaningfully. Whilst high prices over the current winter period were almost certain, the increase in longer-dated prices implies a significantly tighter forward balance beyond the current winter . Amidst the volatility, e valuating fair value for gas prices in the current environment remains challenging. Spot prices remain unanchored, with the key trigger (additional Russian flows) dependant on a relatively binary regulatory decision. However, without a significant Russian ramp up, fundamentals suggest that TTF will be required to continue to price for demand destruction after the current winter to ensure an adequate inventory level ahead of next winter. This is reflected in the move in the SUM-22 contract, which has essentially become unanchored itself (moving out of the coal-gas switching range). Additionally, t he top of the coal-gas switching channel has shifted higher with the move in EUA’s (now trading around €80/tonne), with the ceiling now around €65-70/MWh. We have set our SUM22 forecast just below this ceiling. Given the fact the market will need to build significant stocks ahead of next winter, WIN22 will likely need to rise to incentivise commercial stockbuilds. As such, we are bullish the WIN22 contract relative to SUM22.