As Bloomberg reports, some European natural gas traders are already hedging themselves against possible price increases in the upcoming winter season. The reason is persistent supply disruptions resulting from the conflict in the Middle East.
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Is there an expensive winter coming?
Option contracts concluded in recent days indicate that gas reference prices in Europe may reach up to EUR 100 per megawatt hour in winter. This is more than twice as much as currently, which is related to the expected increase in fuel demand. Such bets reflect market participants' growing belief that a prolonged conflict could make it difficult for Europe to rebuild gas supplies before next winter.
The key problem remains the situation in the Strait of Hormuz – one of the most important transport routes for energy resources in the world. Since the beginning of the war, which broke out at the end of February, this route has remained practically blocked, reminds Bloomberg. As a result, one fifth of global supplies of liquefied natural gas (LNG) was limited, which directly translates into an increase in prices.
While much of the Middle East's LNG supplies typically go to Asian countries, the current disruptions are increasing global competition for available seaborne volumes. Since the outbreak of the conflict, gas prices in Europe have increased by over 40%. and are currently around EUR 47 per megawatt hour.
Insufficient supplies
Although implied volatility – an indicator based on the valuation of options contracts – has fallen from levels seen in the first week of the war, it remains markedly elevated. It has more than tripled since the beginning of the year. At the same time, as Bloomberg points out, last week there was an increase of about 4 percentage points in the valuation of January call options, which indicates a growing scale of protection against the winter price spike.
The level of European gas reserves remains an additional challenge. Warehouses are currently about 34% full, well below the five-year average of about 45% at this time of year. Although the seasonal decline in reserves in winter and their recovery in summer is a natural phenomenon, this year's pace of replenishing reserves remains significantly slower than usual.
