"They keep plummeting." Analysts covering the minute-to-minute results of strategic raw materials start December with anticipation. For the first time in 20 months, the speculative position of the Dutch TTF, the benchmark index for gas prices in Europe, turned short in November. In other words, investment funds that make money by predicting future fuel prices are betting on their fall. These investors base their strategy on the mild temperatures of this winter and recent leaks about a peace agreement for Ukraine. Analysts, on the other hand, are not so sure.
Although a mild climate limited gas extraction from European countries' storage facilities at the beginning of the heating season, in the second half of November, the first waves of polar cold caused a significant reduction in reserves. The cold has moderated again in December, but EU gas reserves are at 76.5% of capacity.
"Despite storage levels below average for this time of year, investment funds are becoming increasingly pessimistic about the European gas market. The latest positioning data shows that speculators have shifted from a net long position of 15.6 terawatt-hours (TWh) to a net short position of 11.4 TWh. This is the first time that funds have been short on the TTF since March 2024," explain from the Commodity Strategy team at ING, concluding that this short position carries "considerable risk" for these investors if "surprises in supply or demand" arise as winter progresses.
Several analysts claim that the offensive of bearish funds has been surprising given the current situation. For Seb Kennedy, founding editor of the Energy Flux analysis platform, the big question is whether the current market setup is "a trap for bears," who have increased their short position to 463 TWh for 16 consecutive weeks, "the longest period of short buying in TTF. At any moment, this could break to the upside." To understand the magnitude of the speculative movement, the volume of fuel equivalent to the funds' short bet exceeds the natural gas consumed in all of Spain last year.
The TTF closed yesterday with a 2% drop, at 28.22 euros. At this time of year, in 2024 and 2023, European gas futures ranged between 40 and 45 euros. The truth is that this moderation will not imply that European households will return to paying pre-war gas prices (15-20 euros). It is unlikely that Moscow and the EU will resume the flow of fuel, and replacing Russian fuel with liquefied natural gas (LNG) shipped from the US implies higher costs. In other words, Europe is moving towards structurally more expensive gas.
In this context, Kennedy finds it striking that speculators are "turning bearish at this early stage of winter and with gas reserves lower than in recent years." He states that short selling now is betting against liquefied gas fluctuations and cold weather, which is "risky before Christmas." For the analyst, "peace in Ukraine is a distant prospect, and the resumption of Russian gas pipeline flow to Europe even more so."
José Ignacio García-Lajara, senior analyst for Gas and LNG Markets at WoodMackenzie, acknowledges that the market partly believes that a "forced peace agreement is possible." "These movements in financial, not physical, positions are causing the geopolitical premium of prices to have diluted in recent days," the analyst points out. The forecast of mild weather for the first half of December contributes to the declines. "Even from a statistical point of view, it seems to be oversold," he warns. Especially after Ukraine claimed attacks this past weekend on tankers from the Russian ghost fleet in the Black Sea.
"Spot gas prices in the TTF continue their general downward trend, motivated by a mild winter in Europe so far, with contained demand and robust Norwegian supply, which has remained steady in recent weeks," agrees Raúl Yunta, president of Mibgas, the Iberian gas market.
In the background is the confidence in a stream of US-origin LNG in the coming years as announced projects come online. "To understand the banks' bet, you have to look at the big picture. With all the supply from next year and the following, as well as the second wave, which will come around 2030, they expect prices to plummet in the short term because the market will not be able to absorb it. They anticipate that there will be no demand for so much LNG and that the price will have no choice but to drop," García-Lajara explains.