JOHN THYS

Europe's benchmark Dutch TTF gas futures briefly broke above €97 per megawatt-hour on Monday (October 26), the first time since the 2022 energy crisis. They have risen about 234% this year, meaning prices are now more than twice their level at the start of the year. Prices eased slightly on Tuesday, hovering around €94.

The latest rally was triggered by weather forecasts. Temperatures in parts of continental Europe are expected to be 2°C to 3°C below normal from this weekend, while north-eastern China, Japan and South Korea are also set to face another cold snap.

The trend across the Atlantic has been the opposite. US natural gas futures for November delivery on the New York Mercantile Exchange fell about 4% on Monday to US$2.526 per million British thermal units, potentially marking their lowest closing level since April 24. They have dropped 21% over the past seven days. The Commodity Weather Group expects October and November combined to be the third-warmest such period in the US since records began in 1950. The market is broadly betting that a strong El Niño will bring a mild winter, while hedge funds' short positions in US natural gas futures have reached a record level.

Stocks are insufficient — and have already started to fall

Europe's problem is not just the weather, but also its thin buffer. Data from the Bruegel think tank showed that EU gas storage stood at only 74.6% as of October 24, compared with 82.9% at the same time last year and 98.5% in 2023, when facilities were close to full. Energy research institute IEEFA said this was the lowest level for the period since records began in 2011 — about 14 percentage points below the average from 2017 to 2025.

More worrying for the market is that stocks have stopped rising. Data released last Thursday by Gas Infrastructure Europe (GIE) showed that EU gas inventories had fallen for the first time this year, with some countries already drawing on winter stocks before November. The EU originally required member states to fill storage facilities to 90% by November 1, but this year it relaxed the target to about 80%.

Root causes: disruption in the Strait of Hormuz and Qatari supply cuts

The failure to replenish stocks during the summer was mainly caused by conflict in the Middle East. Qatar's Ras Laffan LNG facility was attacked in March, damaging about 17% of its export capacity. Qatar's energy minister said repairs would take about three years. Shipping through the Strait of Hormuz has been disrupted, and Qatar exported only 18 LNG cargoes during the first six months of the conflict, compared with 509 during the same period last year. Qatar's exports reportedly recovered to about one-third of pre-war levels in September, but the country has continued force majeure arrangements with some buyers in Europe and Asia.

With part of that supply removed, Europe has had to compete with Asian buyers for limited spot cargoes during the stock-rebuilding season. The futures market also briefly moved into backwardation, with near-term prices higher than those for later delivery, reducing commercial storage operators' incentive to buy gas during the summer.

Tom Marzec-Manser, head of European gas and LNG analysis at energy consultancy Wood Mackenzie, said a cold winter was not the market consensus under the influence of El Niño. But if a cold winter does arrive, inventories will fall further and Europe will have to pay higher prices to divert cargoes from Asia. Other analysts estimate that even if winter temperatures are normal, the conflict in the Middle East ends this year, and Qatar and the United Arab Emirates restore normal output in early 2027, European storage levels could still fall to 17% to 20% by the end of March next year.

Another gas source to disappear from January 1

The policy timetable is also tightening supplies. Under EU rules to phase out Russian gas, short-term contracts for Russian LNG have been banned since April 25 this year, while long-term contracts will be banned from January 1, 2027. The ban on long-term pipeline gas contracts will take effect later, on September 30, 2027, and may be extended to November 1 at the latest. In other words, Europe will have to begin replacing the shortfall in Russian LNG midway through this winter.

Notably, because the ban is approaching, traders have been rushing to buy cargoes before the deadline, meaning EU imports of Russian LNG have reached a record high this year. Once that supply disappears after January, Europe's reliance on other spot sources will only deepen.

Europe and Asia compete for cargoes as costs spread through the supply chain

The Asian LNG benchmark, JKM, was trading at about US$31.4 per million British thermal units on Tuesday. At current exchange rates, TTF is equivalent to about US$32 per million British thermal units, putting European bids slightly above Asian prices to attract cargoes. Importers in Japan, South Korea and China are also facing fiercer competition.

China's LNG imports are mainly covered by long-term contracts, but spot-market premiums will still feed through to procurement costs at coastal receiving terminals. LNG is priced in US dollars, while fluctuations in the renminbi add to hedging difficulties. In Europe, energy-intensive industries such as cement, glass and fertiliser are bearing the brunt, reviving discussion about relocating some production capacity.

Electricity markets are also under pressure. High gas prices are eroding the cost advantage of gas-fired generation, and some coal-fired units may be brought back into service. That would, however, increase spending on carbon allowances. Power grids will need to rely more heavily on nuclear power for baseload supply, supplemented by renewables. The intermittency of wind and solar power, along with lagging investment in energy storage, will increase the cost of maintaining reserve capacity, ultimately feeding through to consumers' electricity bills.

Three indicators to watch

First, EU gas storage data. GIE's AGSI+ platform publishes daily storage levels for each country. With the injection season nearing its end, the focus will shift to the pace of withdrawals and how they compare with the same period in previous years. If a cold snap causes inventories to fall sharply in November and December, forecasts for storage levels at the end of March next year will be revised down further.

Second, the spread between TTF and JKM. A narrowing spread would suggest that additional supplies from the US and elsewhere are flowing to Europe to fill the gap. If Europe needs to pay a sustained premium to secure cargoes, it would indicate that global LNG supplies have not yet genuinely loosened.

Third, the purchasing managers' index (PMI) for Europe's chemical manufacturing sector. If the new orders index falls below 50, the dividing line between expansion and contraction, while production inputs continue to shrink, the impact of high gas prices on the real economy will have moved from figures on paper to actual production cuts. This will be key to determining whether the latest surge is a seasonal spike or a structural problem.