Following a new round of hostilities between the United States and Iran, traders are reassessing the outlook for natural gas supplies from the Middle East. After rising for two consecutive trading sessions, the price of Europe's benchmark Dutch TTF natural gas futures fell slightly on Thursday, settling at 48.725 euros per megawatt-hour.
Despite this, European gas prices continue to hover near their highest levels in approximately one month, as market uncertainty persists regarding the prospects for a resumption of liquefied natural gas (LNG) supplies from the Middle East. Late on July 8 local time, US forces conducted strikes on Iran for a second consecutive day, targeting Iranian infrastructure such as bridges, airports, and ports. Subsequently, Iran retaliated by striking US targets in Kuwait.
Concurrently, reports indicate that with the future of a potential 60-day ceasefire between the US and Iran unclear, the passage of oil tankers through the Strait of Hormuz has "largely halted." In a report dated July 8, Jorge Leon, Head of Geopolitical Analysis at energy research firm Rystad Energy, stated that traffic that day "appeared to have completely stopped." He noted that this reflects the current market's perception of risk, which is more indicative of the situation than any statements from Washington or Tehran.
The conflict between the United States and Iran, which began over four months ago, has resulted in the curtailment of supplies amounting to roughly one-fifth of global LNG trade. For Europe, tightening supply implies the necessity of competing more fiercely with other global buyers for LNG cargoes, both for building gas storage ahead of next winter and for meeting demand during periods of high temperatures.
Currently, natural gas inventories in Europe are significantly below levels seen in previous years. Storage facilities within the European Union are only approximately 51% full, compared to a historical average of around 65% for this time of year. Germany's gas storage levels are even lower, at just over 43%.
Recently, two empty LNG carriers entered the Gulf of Oman and are heading towards the eastern entrance of the Strait of Hormuz, potentially indicating plans to enter the Persian Gulf to load LNG cargoes. However, following the second consecutive day of US airstrikes on Iranian targets, considerable uncertainty remains regarding how quickly gas supplies from the Middle East can be restored.
Persistent risk sentiment in the market is also reflected in the options market. A growing number of traders are beginning to use options to hedge against the risk of a significant spike in winter gas prices. The implied volatility, which measures the cost of options contracts, has continued to climb this week, reaching its highest level in a month.
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