This ain’t no bubble
Investment funds spent six weeks selling hard into a rally that lifted TTF to €80/MWh. The supply risk is real, and ENTSOG’s winter outlook quietly agrees
Iranian attacks on tankers around Hormuz are at their highest since the war began. An LNG carrier was struck near the Strait on Monday, and a tanker was hit late on Wednesday off Qatar. Dutch TTF traded briefly above €80/MWh on Thursday for the first time in three weeks. Later that day Donald Trump said the US would not strike Iran before next month’s midterms, and by the evening TTF was back below €78.
The geopolitical rollercoaster continues; TTF is up more than 60% in three months, and almost 10% since the start of October. It looks increasingly likely that €80/MWh will be a new support level well before the month is out.
Who is not chasing this rally matters as much as who is. Investment funds have cut their net length in TTF for six straight weeks, mostly as prices rose, while commercial firms (the physical players trading the molecules and tasked with replenishing storage) added 80 TWh. We read that as a genuine risk premium, not a speculative bubble: physical supply risk mounting as winter approaches.
ENTSOG, Europe’s gas network operators, did their best to strike a more upbeat note this week while cautioning about outlier risks in a worst-case scenario. The facts are less generous than even that sobering assessment.
ENTSOG’s cautious winter reassurance comes with big caveats
ENTSOG’s latest Winter Supply Outlook concludes that Europe’s gas infrastructure “remains sufficiently flexible to meet demand”. That is welcome news. But it comes with some big caveats.
The starting point is tricky. Storage began October 72% full, against 83% a year earlier. And as ENTSOG itself notes, conflict in the Middle East is still restricting LNG shipments through Hormuz. Europe must compete harder with Asia for cargoes.
So how does ENTSOG square this with its reassurance? Largely by taking a rosy view of LNG. Its central case has Europe repeating its best month of LNG imports in recent winters, every month until spring.
That adds up to about 91 billion cubic metres over the winter, equivalent to about 35 LNG cargoes per week. Europe’s all-time record, set last winter, is 83 Bcm (roughly 32 cargoes per week). Even then, storage ends the winter short of the 30% level that ENTSOG’s model aims for.
If LNG merely matches last winter’s record rather than exceeding it, our sums leave storage only about one-fifth full by the end of winter – the lowest since 2018. And that’s before you factor in a prolonged cold snap, supply shock, or demand proving to be less flexible than ENTSOG’s models assume.
ENTSOG assumes that Russian LNG, banned in the EU from January, will simply be replaced. Its own figures imply Russia supplied about a seventh of the EU’s LNG imports last year. Finding that gas elsewhere means outbidding Asian buyers in a market Hormuz has already tightened. It also does not account for logistical constraints shipping Russian LNG beyond Europe when EU LNG terminals are off limits for reloadings.
ENTSOG’s own stress test shows how thin the margin really is. In a severely cold winter, Europe would have to cut, or go without, about 7% of its gas demand, 12% if LNG imports fall short, and 15% if Russian flows via TurkStream stop as well.
Last year’s Winter Outlook is a reminder that reality can fall short. ENTSOG projected storage to end the winter at 32%. In the end, it landed below 28%.
To be fair, ENTSOG’s job is to operate the pipes and terminals, not to predict the market, and it stresses that its outlook is not a forecast. But its outlook does not model prices; it assumes the gas simply turns up. In reality, price decides that, by pulling in cargoes or pricing out demand.
The mechanics of EU price formation
If price decides whether the gas turns up, the question is what sets that price, and the Energy Flux Chart Deck measures every lever, every week, across 140 slides.
Below the paywall, this week’s top five charts show:
- funds cutting into a rally, and how options drift masks how speculative capital is really positioned
- how the LNG market rewards flexibility and punishes those who must buy optionality at short notice
- the razor-thin arb to Asia and how sunk costs factor into Europe’s winter energy security
- how the permacrisis is not just keeping the wolf from the US LNG door but feeding it handsomely, into the 2030s if the forward curve is to be believed
Plus the full term structure, freight, inter-basin arbitrage, Hormuz crossings and global LNG flows, the TTF Risk Model, LNG Physical Balance Index, and Value-at-Risk analytical mode.
And as always, our trio of interactive data models – the Risk Spine, Risk Cube and Quantum Transits models – are updated weekly with the latest inputs. Browse the gallery here.
Upgrade to read the five charts that matter this week, with our analysis, and download the full 140-slide Chart Deck for a granular analysis of everything from physical to financial factors driving price formation in the European gas market.
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