El Niño could be bearish for the natural gas market, as warmer, wetter, and windier weather conditions will reduce heating and electricity demand. Current European weather forecasts indicate a significantly warmer winter: November and December temperatures are projected to be 1.4 standard deviations above the normal level for the same period over the past 10 years, and January and February 2027 are expected to be 0.5 standard deviations above normal. If these forecasts materialize, all else being equal, natural gas inventory levels at the end of March could be up to 6 percentage points higher than levels based on normal weather assumptions over the past 10 years. More favorable wind and hydropower conditions could further increase inventory levels by 9 percentage points at the end of March.
Despite the significantly warmer winter outlook, especially for the first half of the heating season, we have only incorporated mild adjustments into our model due to the inherent uncertainties in seasonal forecasts. Currently, we assume November temperatures to be approximately 0.7 standard deviations above normal and December temperatures to be approximately 0.5 standard deviations above normal, lower than the approximately 1.4 standard deviations shown in current weather forecasts.
Currently, we have not yet incorporated the potential impact of El Niño on wind and hydropower generation, as well as related changes in thermal power generation and natural gas consumption, into our model. If these factors materialize, it will further shift our assessment of the natural gas supply and demand balance towards a bearish bias.
