This week, the European natural gas market experienced a typical "cold outside, hot inside" scenario. Prices recently fell as much as 3.2% to €27.82 per megawatt-hour, seemingly indicating a bearish trend. However, this pullback is more accurately described as a renewed struggle between bulls and bears driven by new information, rather than a sign of a weakening trend. The real driving force behind the market is the approaching cold snap and continuously declining gas storage inventories. As temperatures drop in many parts of Europe, heating demand increases, natural gas extraction accelerates, and market concerns about winter supply security are intensifying.



The current EU natural gas inventory level is 58%, a figure that seems acceptable, but it holds significant importance for traders. It's not just an indicator of inventory levels, but also a key basis for calculating future supply days and assessing risk premiums. When cold weather and declining inventories occur simultaneously, near-month contracts often react first, as pricing short-term supply-demand gaps have the highest priority. This explains why the TTF settlement price rose by more than 2.5% against the trend on Monday—once cold weather expectations strengthen, traders are more willing to pay a premium for near-term gas delivery.

However, the upward momentum in prices is not solid. While colder weather provides some support, uncertainties remain regarding whether industrial gas demand can continue to recover, whether the power system will rely more on gas-fired power generation, and whether alternative energy sources such as wind power can provide stable output. It is precisely this situation of "tight realities on one hand and an uncertain future on the other" that makes it difficult for the market to form a one-sided trend, and instead makes it more likely to experience a volatile rhythm of "rising and falling back, but not falling too deeply."

The short sellers retreated, but no one dared to launch a major offensive.

If weather and inventory levels are the fundamental drivers, then fund flows act as the regulators of price movements. The latest positioning data shows that investment funds have reduced their net short positions in Dutch TTF natural gas contracts for the third consecutive week, buying 6.2 TWh in the most recent reporting period, bringing the net short position down to 72.4 TWh. This change sends a clear signal: some short positions are being covered and exiting the market.

Short covering is a form of "passive buying," indicating that downward pressure is weakening. Whenever the market experiences a significant pullback, investors who previously shorted will buy back to close their positions to avoid further losses, thus creating support. This is one reason why prices can stabilize or even rebound slightly even without strong bullish news. However, analysts note that this type of operation is more about risk management than a strong bullish outlook. In other words, funds are "hedging" rather than "betting."

Therefore, although short sellers are retreating, there are no signs of large-scale buying. Once prices rebound to key technical or psychological levels, buying momentum often weakens rapidly, and the market falls into a tug-of-war again. This characteristic of "raising the bottom but not the rally" is a true reflection of the current market. Investors are neither willing to short easily nor dare to go long rashly, and the entire market has entered a state of wait-and-see, waiting for the next key variable to break the balance.

With the rules changed, what will be the impact of the extended trading hours?

Besides supply and demand and funding, institutional changes can also be an "invisible driver" amplifying short-term volatility. From February 23rd, the trading hours for natural gas and electricity contracts in the UK and EU will be adjusted to 22 hours per day. This reform aims to better align the European market with mainstream international energy trading hours, especially achieving greater overlap with the trading windows of benchmark contracts for Henry Hub natural gas in the US and natural gas in Japan and South Korea.

This change will have far-reaching implications. First, cross-market price transmission will be more real-time. In the past, due to mismatched trading hours, important news from overseas markets often wouldn't be reflected in European trading sessions until the following day; in the future, the correlation of global energy prices will be significantly enhanced, and any sudden shocks from the Americas or Asia could be transmitted to TTF contracts much more quickly.

Secondly, liquidity distribution will also change. Trading activity that was originally concentrated at the opening and closing times may be digested over a longer period, theoretically helping to smooth out volatility. Conversely, if major events occur, such as extreme weather warnings or geopolitical news, the market may react quickly due to the "ready to trade at any time," potentially leading to price gaps or sharp fluctuations. For short-term traders, this means more opportunities; but for businesses that need to hedge, it means a longer risk control window and increased pressure to monitor the market.

Furthermore, this policy adjustment comes just before the end of the first quarter, and combined with other factors, may further exacerbate market sensitivity.

Amidst undercurrents of portfolio rebalancing, has natural gas been "downgraded"?

Another easily overlooked but significant force is quietly influencing the flow of funds in the energy market—the weighting adjustments of commodity indices. According to the 2026 Bloomberg Commodity Index target weights, crude oil assets have received an overall increase in allocation: Brent crude's weighting has increased from 8.03% to 8.36%, while WTI crude's has slightly decreased but remains at a high level; however, natural gas's weighting has been reduced from 7.78% to 7.2%.

This means that passive funds tracking the index will gradually reduce their holdings of natural gas-related contracts and increase their holdings of crude oil in the near future. It is estimated that WTI crude oil will attract approximately $2.4 billion in inflows, while Brent crude oil may see around $3.6 billion in buying support. In contrast, while natural gas is not facing massive selling pressure, it has at least lost its original "passive buying" support and may even experience short-term volatility due to concentrated position reshuffling.

It's important to note that a rise in crude oil prices does not necessarily mean a corresponding increase in natural gas prices. While both are energy sources, their driving mechanisms differ significantly: crude oil is more influenced by global transportation demand and oil-producing country policies, while natural gas is highly dependent on regional temperature variations, inventory levels, and electricity mix. Therefore, the capital flows resulting from this index rebalancing are more of a structural rebalancing rather than a signal of a sector-wide convergence.

In summary, the European natural gas market is currently in a stalemate, with both bullish and bearish factors at play: the cold snap and declining inventories provide bottom support, while short covering has mitigated the risk of further declines; however, uncertain demand prospects are limiting upside potential. Meanwhile, changes in trading rules and index rebalancing are subtly altering the market environment. Analysts believe that in this context, rather than betting on direction, it's more important to focus on three key clues: first, whether the 58% inventory level will decline more rapidly; second, whether the net short position of funds at 72.4 TWh can continue to shrink; and third, whether the cross-market volatility transmission has significantly strengthened after the extended trading hours on February 23.