As mid-summer approaches, European front month gas prices have dropped by over 80% compared to the start of Winter 2022-23. Summer TTF prices are at a 23-month low and at the bottom of the European coal to gas switching channel (CTGS). This indicates the relative economics of gas-fired power stations versus coal-fired stations for a range of efficiencies.

Along with strong European LNG imports (as discussed in our last note), the current looser gas balance also comes as a result of significantly lower than normal downstream demand since the start of Winter 2022-23. While high prices inhibiting price sensitive demand played a key role, the fact that peak winter was reported as the second mildest on record also led to lower rescom and power sector demand.

However, winter risk is set to rear its head once again into Winter 2023-24. This is reflected by the sharp contango in TTF forward prices, with prices from December 2023 onwards moving back above the top of the European CTGS and remaining there until the next wave of global LNG supply starts coming online in late 2025.

Russian flows are set to remain subdued, and the global LNG supply growth is limited this year. Full European storages heading into winter do not fully offset the risk of either or both:

1. Cold weather in Europe is increasing demand (e.g., over 20 bcm depending on extent below normal), which could bring a return to inelastic demand setting gas prices.
2. Asia’s cold weather is diverting LNG cargoes from the Atlantic Basin, leading to a bidding war for flexible spot LNG volumes.

With European flex constrained by lost Russian supply flexibility, storage capacity mandates, and declining power-sector switching, winter weather deviations are set to have an increasing impact on price movement and resultant volatility going forward.

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