European natural gas stocks are running low, with storage levels before winter potentially at only 72%. Germany and the Netherlands have already dropped below 50%.

(1) The European benchmark natural gas price saw a slight pullback on Tuesday after reaching its highest level since March, as Iran announced renewed negotiations with Oman regarding the Strait of Hormuz. However, prices remained near elevated levels. (2) UBS analysts pointed out that this summer's high temperatures in Europe have increased cooling demand, LNG imports have declined, and the pace of inventory injection has slowed, leaving the EU’s natural gas reserves at a "concerning level" ahead of the heating season. UBS has downgraded its estimate for entering the winter, projecting inventory at about 72%, around 11 percentage points lower than the same period last year, about 18 percentage points below the historical average, and roughly 8 percentage points short of the revised target of 80%. (3) Inventory levels in major consumption markets such as Germany and the Netherlands have dropped to around 50% or even lower, highlighting the most significant gaps. UBS expects inventory will fall to about 25% by the end of the heating season in March next year, about 3 percentage points lower than the same period last year, and supply shortages may persist through the first half of 2027. (4) If the natural gas market remains tight and prices continue to rise, the most direct spillover effect will be seen on short-term German government bonds. In recent months, yields on the short end of German bonds have shown a strong positive correlation with gas prices, as the market bets that rising gas prices will force the European Central Bank to raise interest rates more aggressively. Moving forward, close attention should be paid to changes in European weather and the pace of LNG arrivals and their impact on inventory recovery.