Gas prices in Europe are rising strongly and approaching €70 per MWh, after a new phase of attacks between the US and Iran, the first in a month. The heating season in Europe is approaching, and storage levels are low, according to traders. Benchmark gas contracts in Amsterdam (ICE Endex Dutch TTF) are up 3.2 percent to €69.15 per MWh, after rising as much as 4.2 percent earlier, following a 1.9 percent decline on Friday.
Gas is gaining on Monday after US forces attacked Iranian rocket launchers in the Strait of Hormuz on Sunday in the first military action in a month, thus breaking a period of suspended hostilities. Iran, in what it described as retaliation for the deadly attack, fired rockets toward US bases in Jordan, escalating tensions in a region that is critical to global energy supplies.
According to Tim Hawkins, a spokesman for US Central Command, forces of the Islamic Revolutionary Guard Corps were observed preparing on Larak Island to launch sea mine-carrying missiles toward the strait, and he added that the US military had completed the removal of sea mines from international shipping lanes in the strait over the previous week.
The semi-official media in Iran reported sounds of explosions near Larak Island in the strait, while later Iranian state television showed ballistic missiles being fired by Iran toward US bases in Jordan in response to the American attacks, confirming that Tehran had followed through on its threat of retaliation.
Escalation in the Middle East and its impact on gas markets
The Jordanian armed forces reported that on Monday morning they intercepted eight missiles that had penetrated the country’s airspace, indicating that Iran’s retaliation was not limited to the immediate area of the Strait of Hormuz but was reaching deeper into the region where US forces are stationed. The Iranian army also said on Monday that it had attacked an airbase in the United Arab Emirates where US forces are stationed, with Tehran describing this attack as retaliation for Sunday’s US strike on Larak Island in the Strait of Hormuz, further broadening the scope of the confrontation and raising the risk of a wider regional conflict.
This marks a significant escalation in the ongoing confrontation between the two countries, which has been characterised by a series of tit-for-tat strikes and growing tensions over Iran’s nuclear programme and its military activities in the region, and the latest exchange of fire has heightened fears that the conflict could spread to other parts of the Middle East. The situation in the Strait of Hormuz has been a particular flashpoint for months, as Iran has repeatedly threatened to block the strait in response to US sanctions and pressure, and the latest attacks have raised concerns that the waterway could become the scene of a direct military conflict that could disrupt global energy supplies and send prices soaring even higher.
Analysts point out that the supply of LNG from the Persian Gulf has practically stopped over the last two months, due to the deterioration of the situation in the peace negotiations between the US and Iran, which has further tightened the global gas market and increased competition for available supplies.
Low storage levels and the approaching heating season
The escalation in the Middle East comes at a critical time for Europe, as countries across the continent are under pressure to fill their gas storage facilities before the start of the heating season in October and must compete fiercely with other regions, particularly Asia, for gas from a limited global pool of the fuel.
Gas storage levels in the EU currently stand at 64.7 percent, compared with the five-year average for this time of year of 81.8 percent, and the current storage level of 731.67 TWh is significantly below where it should be at this point in the year, raising concerns about Europe’s ability to meet demand during the winter months.
The low storage levels are the result of a combination of factors, including reduced LNG imports from the Middle East due to the escalating tensions in the region, increased demand for gas in Asia, and the continued disruption of Russian pipeline gas supplies following the invasion of Ukraine and the subsequent sanctions imposed by the EU. The situation in the Middle East has added to the uncertainty in the gas market, as the risk of further disruption to supplies from the region has increased, and this risk premium is being reflected in higher gas prices, which are already at elevated levels compared with previous years.
The coming weeks will be crucial for Europe’s gas market, as countries race to fill their storage facilities before the winter, and any further escalation in the Middle East could make it even more difficult for Europe to secure the gas it needs to get through the winter.
The outlook for gas prices and European energy security
The outlook for gas prices in the coming weeks and months will depend largely on whether the situation in the Middle East de-escalates or whether the confrontation between the US and Iran continues to escalate, as the risk of further disruption to supplies from the region will remain elevated as long as the underlying tensions between the two countries remain unresolved. If the US and Iran can avoid further military escalation, gas prices could stabilise or even retreat somewhat, but the risk of further clashes in the Strait of Hormuz will remain a key factor in the market as long as the underlying tensions persist. The fundamental drivers of gas prices, including global demand, supply constraints and competition with Asia for LNG cargoes, will also continue to influence the market, but geopolitical risk will remain a key factor in the coming weeks and months.
European policymakers and energy companies are closely monitoring the situation in the Middle East, as any further escalation could have serious implications for the continent’s energy security and its ability to meet its winter heating needs, which are already under strain due to the loss of Russian pipeline gas supplies. The current situation serves as a stark reminder of Europe’s vulnerability to geopolitical shocks in the Middle East and the importance of diversifying its energy sources and building resilient supply chains that can withstand disruptions from the region, as the coming winter could be one of the most challenging for Europe’s gas market in recent history.
The coming days and weeks will be crucial in determining whether the latest escalation in the Middle East leads to a broader conflict or whether both sides step back from the brink, but one thing is certain, the situation in the Middle East will remain a key focus of global attention in the period ahead as the world watches to see whether the US and Iran can find a way to avoid a full-scale military confrontation that could have devastating consequences for the global economy.
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