European Gas Prices Hover Near Multi-Year Highs on Mideast Supply Risks

European and British wholesale natural gas prices remained near multi-year peaks on Thursday, buoyed by mounting geopolitical risks in the Persian Gulf that threaten global energy supplies ahead of the winter heating season.

Geopolitical Tensions Rattle Supply Chains

Fears over supply security have intensified following a series of military escalations in the Middle East, according to reports. The conflict, which involves Iranian-backed Houthi strikes on Saudi Arabia and direct military exchanges between the U.S. and Iran, poses a direct threat to maritime transit through the Strait of Hormuz.

This channel is a critical chokepoint for global energy markets, handling approximately 20% of the world's liquefied natural gas (LNG) traffic, primarily from major producer Qatar. The risk of shipping disruptions has forced European buyers into heightened competition with Asia for available LNG cargoes from the Atlantic basin.

Market Pricing and Storage Levels

The supply concerns were reflected in benchmark prices, which consolidated gains from the previous session. Key figures include:

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• The Dutch front-month contract, Europe's benchmark, traded at €79.64 per megawatt-hour (MWh), a 0.5% increase and close to its highest level since 2023.
• In Great Britain, the equivalent wholesale contract rose 0.6% to 198.00 pence per therm, approaching its highest point since late 2022.

This price strength comes at a precarious time for the continent's energy reserves. According to data from Gas Infrastructure Europe, the region's underground storage facilities are filled to approximately 62% of capacity, trailing the five-year seasonal average by about 17 percentage points.

Implications for Monetary Policy

The surge in energy costs is a key factor for the European Central Bank (ECB), which is set to announce its latest monetary policy decision on Thursday. Persistent price pressures from energy are a major driver of inflation across the Eurozone.

Money markets have almost fully priced in a 25-basis-point interest rate increase from the ECB, which would take its benchmark deposit rate to 2.50%. Policymakers are aiming to prevent high energy prices from causing broader, second-round inflationary effects throughout the economy.