European natural gas prices rose sharply on Friday, ending the week at levels not seen since the end of 2022. Traders scrambled for supplies as the military conflict in the Middle East worsened and diplomats began leaving the region, adding to jitters over winter energy deliveries.
The benchmark Dutch TTF front-month contract closed 3.8% higher at 93.40 euros per megawatt-hour (MWh) on Friday. This resulted in a jump of about 7% for the entire week.
In the UK, the equivalent NBP futures contract followed the same pattern. It rose 3.5% on the day to 229.00 pence per therm, taking its weekly gain to 6.2%. Both key benchmarks now sit at highs last recorded in 2022 as the energy desk factors in rising conflict risk premiums.
Houthi attacks and US diplomatic shortcomings
The main reason behind Friday's price rise was the accelerated deterioration in Middle East security, which directly threatens key maritime shipping lanes.
Yemen's Iran-aligned Houthis launched coordinated missile and drone attacks against transportation hubs and energy facilities across Saudi Arabia. These included a deadly attack on a commercial airport in Dammam and a direct attack on Saudi Aramco's Shayba oil field.
Right after these attacks, the US State Department asked non-essential personnel and their family members to leave diplomatic posts in Saudi Arabia. Authorities are already preparing to pull workers from other regional centers as well.
Due to the worsening fighting, liquefied natural gas (LNG) tankers are barely able to pass through the Strait of Hormuz. Ships now have to take the longer route around the southern tip of Africa, reducing deliveries reaching European import terminals.
Diplomacy and oil stopped at $114
Energy markets faced another blow of pressure as talks between Western governments and Tehran stalled, with crude oil surging.
The Iranian leadership made it clear that they would not talk with Washington. Meanwhile, local state media reported unexplained explosions near the strategic port of Sirik, located on the Strait of Hormuz.
Global benchmark Brent crude hit $114 a barrel on Friday, its highest price in more than five months. This increase further exacerbates the rising production costs of heavy industries across Europe.
European gas storage is running low
This big weekly jump in gas prices puts Europe in a risky position as cold weather approaches.
Underground storage sites across the EU are currently only about 75% full. Typically, by the end of October, storage levels sit near 86%. If there is a premature interruption, it puts power companies and utilities in a very difficult situation.
Middle Eastern LNG deliveries to Europe are down about 80% from last year due to transit chokepoints. As a result, European buyers will have to compete head-to-head against Asian utilities for Atlantic-based spot shipments, while keeping higher price levels under European gas contracts.
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Key points for European gas and energy traders
- Tight Winter Buffers:With the EU's underground storage at only 75% compared to the usual 86%, the unexpected cold snap will cause a sharp rise in prices.
- Shipping Constraints:Tankers avoiding the Strait of Hormuz will have to detour to Africa, severely disrupting the flow of LNG to European docks.
- Fierce Bidding War:European utilities will have to outbid Asian buyers to grab flexible Atlantic cargoes, meaning price fluctuations will remain limited for now.