European gas caps strong weekly gain on Middle East supply escalation

Wholesale natural gas prices in Europe skyrocketed on Friday, poised to reach their highest levels since late 2022, as tensions escalated in the Middle East and fears mounted about potential disruptions to global LNG supply ahead of the winter months. The benchmark index climbed 3.8% on Friday, closing at 93.40 euros per megawatt-hour (MWh) and marking a nearly 7% increase over the previous week.

In the United Kingdom, gas prices rose 3.5% to 229.00 pence per therm, on track to end the week 6.2% higher. Both benchmarks hit their 2022 high points, reflecting the growing concern over the geopolitical risk premium.

The surge in gas prices was triggered by a significant deterioration in Middle Eastern security, which jeopardizes vital sea lanes of communication. Iranian-backed Houthi rebels carried out a series of coordinated drone and missile attacks on civilian transportation and energy facilities in Saudi Arabia, including a fatal strike on a civilian airport in Dammam and an assault on the Shaybah oilfield.

In response, the U.S. State Department ordered non-essential personnel and their families to evacuate American diplomatic missions in Saudi Arabia, with plans in motion to withdraw personnel from additional regional outposts.

The conflict has severely hampered the navigation of Liquefied Natural Gas (LNG) carriers through the Strait of Hormuz, prompting longer detours around Africa and substantially reducing spot arrivals at European regasification terminals. Energy markets responded positively, driven by the freeze in diplomatic relations between Tehran and Western nations, coupled with a parallel rally in international crude oil markets.

Iranian officials explicitly rejected negotiations with Washington, while state-run media reported unexplained explosions near the critical port of Sirik along the Strait of Hormuz.

Benchmark prices surged to $114 per barrel on Friday, their highest level in over five months, underscoring broad-based inflationary pressures and added input costs for energy-intensive European industries. The substantial weekly increase in European gas prices leaves the continent highly susceptible as heating demand surges ahead of winter.

As of now, underground gas storage facilities in the European Union are at around 75% capacity, considerably lower than the historical average of 86% for late October. This leaves utilities with limited safety margins against early cold spells. Given that Middle Eastern LNG imports to Europe are nearly 80% below year-ago levels due to shipping constraints, European buyers are facing intense price competition from Asian utilities for uncommitted cargoes from the Atlantic basin, providing a solid foundation for support in European paper contracts.