European Natural Gas Prices Rise 2% on Hormuz Threats, Low Inventories

European and British wholesale natural gas prices climbed 2% on Monday, hovering near their highest levels since late 2023 as escalating military tensions in the Persian Gulf and persistent storage deficits heightened concerns over winter supply security.

The benchmark Dutch front-month contract rose to approximately 73.80 euros per megawatt-hour (MWh), just shy of a multi-year peak of 74.32 euros set last week. In the U.K., the equivalent NBP wholesale contract also gained 2%, trading around 182.50 pence per therm.

Tensions Threaten Key LNG Chokepoint

Market sentiment grew more cautious after Iranian authorities announced plans to declare a restricted zone near the Strait of Hormuz, a critical chokepoint for global energy flows. According to the source, the warning followed recent military action where U.S. forces struck three Iranian oil tankers in response to a ballistic missile attack on U.S. Navy warships by the Islamic Revolutionary Guard Corps (IRGC).

This development introduces a significant geopolitical risk premium into energy prices. The Strait of Hormuz facilitates the passage of roughly one-fifth of the world's liquefied natural gas (LNG), with a large portion originating from Qatar. Any disruption could severely restrict a vital supply route to Europe, forcing utilities to bid more aggressively against Asian buyers for available LNG cargoes from the Atlantic basin.

Storage Deficits Amplify Winter Risks

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The geopolitical shock is compounded by Europe's weak inventory position heading into the colder months. Data from Gas Infrastructure Europe shows that regional storage facilities are filled to approximately 62% of capacity, which is about 17 percentage points below the five-year seasonal average.

This shortfall is attributed to several factors, including increased demand for gas-fired power generation during summer heatwaves, routine maintenance on Norwegian pipelines, and delayed LNG cargo deliveries in August. Analysts warn that with storage replenishment lagging, any sustained interruption to LNG supplies this autumn will leave the continent highly exposed to price spikes during winter cold snaps.

Inflationary Pressures Complicate ECB Outlook

The persistent strength in energy markets, with Brent crude also trading above $90 a barrel, is fueling broader inflation concerns. The surge in energy input costs complicates the policy decisions for the European Central Bank (ECB), which is scheduled to meet on Thursday.

Headline inflation in the Eurozone accelerated to 3.3% in August, largely driven by a 14.3% year-over-year increase in the energy component. As a result, money markets are now almost fully pricing in the probability of a 25-basis-point interest rate hike by the ECB this week.