European gas prices surge further on Hormuz crisis

European gas prices have surged once more as a result of Iran’s blockade of the Strait of Hormuz that has knocked out around a fifth of global LNG supply. 

The TTF front month contract ended trading on March 6 at almost €69 per MWh ($850 per 1,000 cubic metres), its highest point in three years. But it lost some of that steep gain on March 9, and as of 07:30 GMT was priced at €62.6 per MWh. 

As NewsBase has reported, Europe was already facing supply security risks before the Iran crisis began, as its storage facilities were significantly depleted following an unusually cold winter. That was before Qatar last week halted LNG production, removing around 20% of the world’s global LNG supply. Much of that volume went to Asia, but it has also had a seriously adverse effect on pricing in Europe. The continent now faces intense competition with Asia for LNG cargoes. 

Prices in Europe rose much higher during the 2022 energy crisis, with the TTF front-month contract peaking at €340 per MWh in August 2022 when Russia closed the Nord Stream pipelines. Back then, though, Europe was able to outcompete Asia for LNG shipments, and still had larger volumes of Russian pipeline gas flowing than it does today. Exacerbating the crisis, Russian President Vladimir Putin has threatened to cut off remaining Russian gas to the EU, linking it to the bloc’s decision to phase out those supplies over the next two years.

Looking ahead, Europe will struggle to restock gas before next winter. Its facilities are currently less than 30% full with high prices triggering further withdrawals. The market is now in a state of backwardation, with prices next winter lower than the present ones. Unless the situation changes, this means there is no incentive for traders to stockpile gas during the warmer months in preparation for winter, as doing so would lose them money.

Structurally, Europe’s gas system is weaker than it was before the war in Ukraine. The loss of Russian pipeline gas has removed a key swing supply, while widespread coal plant closures have eliminated another stabilising mechanism during periods of high prices. Inventories now carry a greater share of the burden of balancing the system.

Other risks include potential disruption in US LNG or Norwegian pipeline supply, or weak performance from renewable sources, which the bloc now relies on more than ever to cover its electricity needs, as well as outages at France’s vast nuclear power fleet.