European natural gas traders are already hedging against a significant price surge next winter, anticipating benchmark prices could hit €100 per megawatt-hour, more than double the current level. Option contracts traded last week reflect these expectations as the conflict in the Middle East continues to disrupt supplies.
Since the conflict began, benchmark gas prices have climbed more than 40% and are currently trading around €47 per megawatt-hour. The effective closure of the Strait of Hormuz since late February, a vital waterway for global energy shipments, has cut off a fifth of the world’s liquefied natural gas (LNG) supplies, driving prices higher. While most Middle Eastern gas typically heads to Asia, this disruption threatens to intensify competition for limited global seaborne volumes.
Market Indicators and Trader Sentiment
These bets reflect growing trader confidence that a prolonged conflict could jeopardize Europe’s already slow efforts to replenish gas storage ahead of next winter. Implied volatility—a measure derived from the cost of underlying option contracts—has fallen from its peaks in the first week of the conflict, but it has more than tripled since the start of this year. The January call skew has risen by 4 percentage points over the past week, as traders added protection against winter price increases.
Challenges for Gas Storage
Currently, the region’s major storage facilities are approximately 34% full. This figure is significantly below the five-year average of 45% for this time of year. While it is normal for stocks to decline in winter and be refilled in summer, this year’s replenishment campaign has had a slow start.
Source: Bloomberg Markets
