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Why the European natural gas rally may be coming to an end

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

 

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: soojin.kim@ae.mufg.jp

 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Global commodities

Global markets only need to see signs of supply risks in the already fragile European gas market to send prices (TTF) higher – and the playbook has been on full display since the turn of the year with prices reaching two year highs on colder-than-average weather and Asian competition for liquefied natural gas (LNG) imports. Yet, three key developments reinforce why prices may ease from here onwards. First, President Trump has lifted the Biden administration’s pause on new Department of Energy (DoE) permits for LNG export facilities – which eases the path for new facilities to advance. Second, China has instituted tariffs on US energy imports. Third, reports that President Trump will introduce a plan to reach a peace agreement for Ukraine at the Munich Security Conference (14-16 February) that may lead to higher Russian pipeline natural gas flows through Ukraine to Europe – which would effectively restore the continent’s cost competitiveness back to pre-2021 energy crisis levels, enabling the region to compete more effectively with China export pressure. All in, these three forces, alongside the mega-wave of LNG supply that is set to hit markets from 2026 onwards from projects already under construction, strengthen our delayed (not derailed) bearish natural gas view. We hold conviction that this will cause significant downside pressure to TTF prices to the ~EUR20s/MWh levels in 2026 – below lignite economics to manage storage, which is not priced into today’s forwards.

Energy

Notwithstanding expectations that OPEC+ may postpone production increases beyond April, crude oil prices are falling after US President Trump and Russian President Putin agreed to talks on ending the war in Ukraine, sparking speculation that risks to Russian supply may ease. Meanwhile, European natural gas prices (TTF) are now closer to the gas-to-oil switching range for fuel oil and distillate products in European industry, ~EUR65-85/MWh, and are likely already incentivising marked switching to propane.

Base metals

President Trump has increased the US aluminium import tariff from 10% to 25%, maintained the steel import tariff at 25%, and removed all the exemptions, which allowed for duty-free imports of steel and aluminium and limited the impact on US prices. Conditional on no marked exemptions, we anticipate the aluminium and steel tariffs to be predominantly passed through to US (not global) prices.

Precious metals

Gold has had an outstanding start to 2025, surpassing even our own above consensus expectations, closing in on USD3,000/oz which we had forecasted (in our Commodities 2025 outlook) for bullion to rise to this level in only Q3 2025. We hold conviction that gold’s brisk start to the year has much further to run owing to two dimension – (i) “fear” as the geopolitical hedge of first resort in a world mired in elevated uncertainties; and (ii) “wealth” on EM central bank gold accumulation catalysed by sanctions apprehensions.

Bulk commodities

Iron ore is trading near four month highs with the support factor stemming from a tropical cyclone that is disrupting operations at Australia’s largest export hub – the Pilbara in Western Australia. Meanwhile, traders are weighing the potential fallout for the market from the US imposition of a 25% tariff on steel and aluminium imports, as well as broader levies on China, which may affect iron ore implicitly if rival producers slow production.

Agriculture

The US Department of Agriculture (USDA) has cut its world corn supply outlook owing to a deterioration of South America’s fields due to a lack of rain, affecting corn corps in Argentina, Brazil and Paraguay. Meanwhile, markets remain on edge from President Trump’s tariff strategy – and the potential retaliation that may hamper demand for US agricultural products.

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.