Citigroup: European Gas Prices Overstate Winter and Hormuz Risks

European natural gas prices may be pricing in too much risk from potential supply disruptions, with a recent Citigroup analysis suggesting a significant gap between current market levels and a probability-weighted valuation for the upcoming winter.

Market Overpricing Risk, Citi Says

Citigroup's analysis calculates a probability-weighted price for the winter at approximately €61 per megawatt-hour (€/MWh). This stands in contrast to the market pricing at the time of the bank's report, which saw the October 2026 Dutch Title Transfer Facility (TTF) contract at €72.90/MWh and the November-March winter strip at €70.90/MWh.

The considerable gap suggests the market is assigning a substantial premium to risks associated with the uncertain reopening of the Strait of Hormuz and potential cold weather, according to the bank. This situation has also attracted new investors to the market, drawn by the potential impact of gas prices on inflation and memories of the 2022 energy crisis.

Dual Uncertainties Fuel Volatility

Recent price volatility in the European gas market is being driven by two primary variables: the timeline for resuming normal transit through the Strait of Hormuz and the severity of the coming winter. The market's sensitivity is heightened by low European gas storage levels heading into the heating season, making it more vulnerable to any disruption in liquefied natural gas (LNG) supplies.

The uncertainty has had a ripple effect, contributing to a rise in Asian LNG prices, as the two regions are connected through the global LNG trade. To account for the variables, Citi's model uses different combinations of Hormuz reopening timelines and weather scenarios rather than a single base case.

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Investment Funds Seen as Key Driver

Citi noted that the current price rally appears to be driven by a broader base than in previous periods, with fundamental buyers and investment funds playing a larger role. The bank's analysis over the past three years indicates that investment funds are now a key driver of European gas prices, making the market vulnerable to a sudden reversal if supply fears begin to fade.

Citing the sharp unwinding of oil prices in late 2018 as a precedent, Citigroup has revised its own gas price forecasts downward. The bank's new estimates are:

• Q3 2026: €60/MWh
• Q4 2026: €56/MWh
• 2027: €41/MWh

While Citi acknowledges that prices could move significantly higher in adverse scenarios, its analysis questions whether those risks are already more than fully reflected in current prices.