Citigroup estimates European natural gas is pricing in more risk than it should, putting a probability-weighted winter price near €61 per megawatt-hour against contracts trading well above that level. The bank says fundamental buyers and outside investors likely play a larger role than traditional energy traders in driving the rally, which raises the risk of a sharp reversal if fears around the Strait of Hormuz and winter weather fade.
Citi sees a gap between price and risk
Citi's probability-weighted estimate for winter gas puts fair value at about €61 per megawatt-hour, well below where the market currently trades. The October 2026 TTF contract sits at €72.90/MWh. The November-March strip trades at €70.90/MWh. That gap suggests the market is assigning a substantial premium to supply and weather risk.
Hormuz and weather keep the market volatile
Traders are weighing two uncertain variables at once: when transit through the Strait of Hormuz normalizes, and how cold the winter turns out to be. European storage levels are low heading into winter, leaving the market more sensitive to any disruption in LNG supply, and Asian LNG prices have risen too, since the two markets are linked through global trade.
Citi said the situation has drawn in investors from outside the traditional energy market, partly because gas prices can feed into inflation and partly because of memories of the sharp price increases triggered by 2022 supply cuts. Rather than a single base case, Citi modeled combinations of Hormuz reopening timelines and winter conditions, then averaged the outcomes by probability.
Funds drive the rally, but Citi flags downside risk
Citi said current positioning does not look as stretched as it was in March 2026 or in 2024, despite prices sitting significantly higher. That suggests fundamental buyers and investment funds are likely playing a larger role than traders already positioned in the market.
The bank's three-year analysis found investment funds are now a key driver of European gas prices, more so than in the period following the initial Russia-Ukraine shock. That makes the market vulnerable to sudden reversals — Citi pointed to the sharp move in oil prices in late 2018 as a reminder that energy markets can unwind quickly once supply fears fade.
Citi has revised its forecasts to €60/MWh for Q3 2026, €56/MWh for Q4 2026 and €41/MWh for 2027. The bank said prices could still move significantly higher under adverse scenarios, but the key question is whether those risks are already reflected in current levels.
Source: Investing.com
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