European Gas Update – Risk Transfer

Our conversations at E-world last week focussed on the critical importance of regulatory decision-making on European gas price formation over Sum-25 . Facing inverted price signals and several failed storage auctions, the question ultimately comes down to whether regulators will decide to subsidise injections or lower storage targets . Our view here is relatively binary – lower storage requirements will eliminate a significant volume of inflexible injection demand from the summer balance, easing price pressure on the Sum-25 contract and shifting risk onto Win-25 . In this case, we would expect TTF to price near our assessment of fundamental fair value over Sum-25 (at domestic and international demand destruction levels; top of European gas-coal switching channel, LPG parity) with distortionary price realisations driven by the intersection of forced buying and speculative positioning far less likely. This is currently our base-case. If , however targets are maintained and injections are subsidi s ed, the inverted curve structure can be sustained for longer with additional upside pressure placed on the Sum-25 contract, irrespective of underlying fundamentals.