(Bloomberg) — Some European natural gas traders are already hedging against a spike in prices next winter as the war in the Middle East continues to disrupt 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 wagers reflect growing confidence among traders that a lengthy conflict could jeopardize the already slow efforts in Europe to refill inventories ahead of next winter.
The Strait of Hormuz — a vital waterway for global energy supplies — has been effectively closed since the war began at the end of February, choking off a fifth of the world’s liquefied natural gas supplies and 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.
While 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, it’s more than tripled since the start of this year. And the call skew for January increased by 4 percentage points over the past week as traders added protection against a winter rally.
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.
October-March strips of €75/€100 call spreads have been trading over the past week, along with risk reversals at different levels — buying €75 and €100 calls, selling €42 and €35 puts, according to data compiled by Bloomberg.
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