Is the TTF gas forward curve overpriced? TTF futures are hovering well-above their historic averages along the curve, despite the robust LNG wave which is building up on the horizon.
TTF contracts are averaging at near $10/mmbtu during the 2025-29 period, almost the double of their average through 2016-20
TTF contracts are averaging at near $10/mmbtu during the 2025-29 period, almost the double of their average through 2016-20, when the gas market was fairly well-supplied, supported by the first US LNG wave and robust Russian piped gas deliveries to Europe.
Since the 2022/23 gas supply shock, gas markets moved towards a gradual rebalancing and prices softened to well-below their 2022 levels, when TTF averaged at just over $40/mmbtu.
Looking at the medium-term, the gas market is set to embrace the largest LNG expansion ever, with around 270 bcm/y of liquefaction capacity under construction and most of which is expected to come online before the end of the decade.
Hence, it is surprising that the forward curve seems to be rather immune to this mega LNG wave, with contracts averaging at near $10/mmbtu through the 2025-29 period.
If all the 270 bcm/y liquefaction capacity would come online, it is very likely that TTF prices would be pushed close to the short-run marginal costs of US LNG, with some premium still persisting in the early times of the wave (2025, H1 2026).
This would translate to prices oscillating around $5/mmbtu over the medium-term. and this is making the assumption, that all this LNG will find a home, and no shut-ins will occur.
So, why is the TTF forward is so overpriced? There are potentially three reasons:
(1) the market expects long project delays compared to official announcements: we have seen recently some delays, but also some projects are now ahead of their schedule (e.g. Plaquemines, Corpus Christi Stage 3);
(2) a very strong demand response from Asia: this will be a key balancing item over the time horizon, but to unlock price sensitive Asian demand at a large scale, gas prices would need to fall (at least) to below $8/mmbtu;
(3) the forward curve is rather illiquid beyond Y+1 and fails to reflect some of the underlying market fundamentals, as it is converging to the more liquid front-end contracts.
I would rather bet on point 3… in any case, this is just a call for caution to anyone considering to lock-in current future contracts, the downside risk is probably significantly greater.
What is your view? How will gas prices evolve over the medium-term? Is the forward overpriced? And will it be washed away by the coming LNG wave?
Source: Greg MOLNAR. Join the conversation on LINKEDIN
