After a sharp rally in May, European gas has entered a correction phase. The TTF contract fell to around €48/MWh in early June amid reports of progress in negotiations between the United States and Iran, as well as easing concerns over potential supply disruptions in the Middle East.
The market is gradually pricing out the geopolitical premium that had been built into prices in previous weeks.
Selling pressure is increasing, but the decline still appears technical
The current correction is largely driven by profit-taking following the strong rally and a reduced likelihood of immediate escalation around the Strait of Hormuz. Additional factors include relatively mild weather conditions in Europe and weak seasonal demand. However, the decline is not yet supported by an improvement in the market’s fundamental balance: European gas storage is only about 40% full, significantly below average levels seen in recent years.
Europe remains vulnerable to any LNG supply disruptions
Despite the drop in prices, the market continues to exhibit structural tightness. Europe remains heavily dependent on LNG imports, and competition with Asia for available cargoes may intensify in the second half of summer. Analysts at Rabobank and ING note that the market may be pricing in a normalization scenario too quickly, while any new disruptions could quickly push prices higher again.
Near-term outlook
The recovery in NATGAS prices was capped by resistance near the $3.24 level, where, as I noted in the article Natural gas approaches key resistance at $3.24, profit-taking on long positions emerged, causing prices to retreat toward support around $3.00. From current levels, an upward rebound is possible; however, a break below support would open the way for a decline toward $2.90.
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