Natural gas: Europe faces winter supply risks while US traders bet on lower prices

Low European inventories increase winter vulnerability

Europe enters the winter withdrawal season with storage facilities just 74.3% full, well below the five-year seasonal average near 90%. This leaves the region with a significantly smaller buffer against prolonged cold spells or unexpected supply disruptions. The vulnerability is compounded by the fact that gas withdrawn from storage typically covers less than 30% of Europe's winter consumption, leaving the region heavily dependent on continued pipeline imports and LNG deliveries to meet the remaining demand.

The coming months will therefore be critical, with European demand depending not only on temperatures but also on the frequency of Dunkelflaute episodes, when low wind and solar generation increase reliance on gas- and coal-fired power generation.

Meanwhile, Europe will have to compete with Asian buyers for available seaborne LNG supplies. With both Dutch TTF and Asian LNG prices trading near USD 30/MMBtu, the relative strength of winter demand across the two regions will help determine where flexible cargoes are directed.

US hedge funds build biggest gas short since 2020

Across the Atlantic, the picture is markedly different. US Henry Hub natural gas continues to trade below USD 3/MMBtu, supported by robust domestic production and expectations that a strong El Niño could reduce heating demand this winter.

In the reporting week to 27 October, managed money accounts increased their combined net short across the two main Henry Hub futures contracts traded on CME and ICE to the highest level since 2020. In the benchmark CME contract alone, leveraged accounts held a net short of approximately 205,000 contracts, equivalent to 2.05 trillion cubic feet of gas.

The bearish positioning reflects expectations of weaker heating demand, with US underground storage currently near 3.7 trillion cubic feet, broadly in line with the five-year seasonal average. However, the increasingly crowded short position also raises the risk of a sharp reversal should weather forecasts turn colder or demand surprise to the upside.

Outlook: Weather and diplomacy hold the key

The global gas market remains divided between a supply-constrained Europe and Asia, and a relatively well-supplied US market where speculative traders are betting heavily on a mild winter.

A diplomatic breakthrough in the Middle East could trigger a substantial correction in international gas prices, but a sustained decline will likely require both improving supply visibility and evidence that winter demand can be met without excessive storage withdrawals. In the US, meanwhile, the risk is increasingly one of short covering should the weather outlook turn less favourable for bearish positions.