European Gas Traders Take Out Options to Mitigate Winter Price Volatility

European Gas Traders Hedge Against Winter Price Spike

Some European natural gas traders are already preparing for a potential price surge next winter as the ongoing war in the Middle East continues to disrupt global energy supplies. Options contracts traded over the past week suggest that European benchmark gas prices could reach as high as €100 a megawatt-hour next winter, more than double the current level, when fuel consumption surges.

The war in the Middle East has effectively closed the Strait of Hormuz, a vital waterway for global energy supplies, since its beginning at the end of February. This has choked off a fifth of the world's liquefied natural gas supplies, driving prices higher. While most gas from the Middle East normally goes to Asia, the disruption has threatened to intensify competition for a limited global pool of seaborne supply.

Benchmark gas prices have risen more than 40% since the start of the war and are now trading near €47 a megawatt-hour. Implied volatility, a measure derived from the cost of underlying options contracts, has come down from the peaks during the first week of the war but is more than tripled since the start of this year.

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The region's vast storage facilities are now about 34% full, significantly below the 45% five-year average for this time of the year. While it's normal for storage to decline in winter and be refilled in summer, this year's campaign has been slow to take off.

These trends are reflected in the growing confidence among traders that a lengthy conflict could jeopardize the already slow efforts in Europe to refill inventories ahead of next winter. The call skew for January increased by 4 percentage points over the past week as traders added protection against a winter rally.