European natural gas prices may be pricing in too much risk from the uncertain reopening of the Strait of Hormuz and the coming winter, with Citigroup estimating a probability-weighted winter price well below current market levels.

Citi's analysis puts the probability-weighted price for the winter at about €61 per megawatt-hour, compared with an October 2026 TTF contract at €72.90/MWh and the November-March strip at €70.90/MWh at the time of the bank's analysis. The gap suggests the market is assigning a substantial premium to the risks around supply disruptions and weather.

TTF, the Dutch Title Transfer Facility, is Europe's benchmark gas price and a global reference point for LNG cargoes, so its levels ripple through contracts and consumer energy costs far beyond the Netherlands.

Hormuz and weather keep TTF volatile

European gas prices have risen sharply and remained volatile because traders are trying to assess two uncertain variables at the same time — when normal transit through the Strait of Hormuz will resume and how cold the coming winter will be.

The uncertainty is particularly important because European gas storage levels are low heading into winter, leaving the market more sensitive to any disruption in liquefied natural gas supplies. A large share of global LNG trade — including shipments from top exporter Qatar — passes through Hormuz, making the strait a chokepoint for the seaborne gas market even though Europe itself does not import through it directly. Asian LNG prices have also risen, with the two markets linked through the global LNG trade.

Citi said the situation has also attracted more investors from outside the traditional energy market, partly because gas prices can feed into inflation and because of memories of the sharp price increases triggered by supply cuts in 2022.

Rather than using a single base-case scenario, Citi modeled different combinations of Hormuz reopening timelines and winter weather conditions, then calculated a probability-weighted average of the resulting prices.

Funds add to the rally, but Citi sees downside

Citi said current positioning does not appear as stretched as it was during March 2026 or in 2024, despite prices being significantly higher. That suggests the rally is not being driven only by traders already positioned in the market, with fundamental buyers and investment funds likely playing a larger role.

The bank said its analysis of the past three years indicates that investment funds are currently a key driver of European gas prices, particularly when compared with the period following the initial Russia-Ukraine war 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 rapidly when supply fears fade.

Citi has therefore revised its gas-price forecasts to €60/MWh for the third quarter of 2026, €56/MWh for the fourth quarter and €41/MWh for 2027.

The bank said it recognizes that prices could move significantly higher under adverse scenarios, but the key question is whether those risks are already fully reflected in current prices. For market watchers, the signposts ahead include developments around Hormuz transit, storage drawdown rates as winter arrives, and whether investment-fund positioning continues to build — the same factors Citi's probability-weighted framework hinges on.

Source: Investing.com via Hellenic Shipping News