European Natural Gas Heads for Third Weekly Gain Despite Pullback from 5-Month High

European benchmark natural gas prices retreated from a five-month high on Friday but remained on course for a third consecutive weekly gain, as tight supply fundamentals and low inventory levels continue to support the market.

The front-month Dutch TTF futures contract, a key benchmark for European gas, pulled back after a multi-day rally that had pushed it to its highest point since March 19. The equivalent UK wholesale contract also saw weekly gains, reflecting persistent concerns across the continent's energy markets.

Geopolitical Risk Premium Eases

Prices had surged earlier in the week as traders priced in the risk of escalating tensions in the Middle East, which could disrupt liquefied natural gas (LNG) shipments from major producers like Qatar through the Strait of Hormuz.

However, the rally lost steam following reports that regional mediators, including Qatar and Oman, were in talks with Washington and Tehran to ensure the safe passage of commercial vessels. This development helped ease the immediate geopolitical risk premium, prompting a pullback from the recent highs, according to a report from Investing.com.

Low Storage Levels Underpin Prices

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Despite the daily price drop, the market's underlying fundamentals remain tight. A significant structural risk premium is embedded in prices due to concerns over Europe's gas supply ahead of the winter heating season.

Key data points underscoring the supply tightness include:

• EU underground gas storage is currently at approximately 62% of total capacity, according to Gas Infrastructure Europe.
• This is well below the five-year seasonal average of nearly 79% for this time of year.

The slow pace of refilling inventories has been exacerbated by strong summer electricity demand from prolonged high temperatures and by routine maintenance at offshore gas fields in Norway, which has constrained available supply.