European natural gas prices have spiked by more than 60 per cent since the start of the month, driven by the outbreak of hostilities between the US and Iran. In response to US strikes, Tehran has moved to “choke off” the Strait of Hormuz. While a formal blockade has not been officially declared, shipping companies have diverted vessels from the critical waterway to avoid potential attacks. This disruption affects not only crude oil tankers but also liquefied natural gas (LNG) carriers. Qatar, one of the world’s pre-eminent gas exporters, is at the heart of the crisis.
Qatar accounts for approximately 20 per cent of global LNG trade and remains the fourth-largest supplier to the European Union, having previously held a higher ranking before the US ramped up exports and Doha redirected volumes toward Asia (where JKM benchmarks are currently outpacing European price gains). Qatar has reportedly suspended liquefaction operations and shuttered its terminal pending a stabilisation of the security situation.
LNG tanker transits through the Strait of Hormuz are falling sharply (7-day moving average). Source: Bloomberg Finance LP
The geopolitical friction has triggered a dramatic rally in European TTF gas prices, which have breached the €50 per megawatt-hour mark—a 60 per cent jump from Friday’s close. Although the winter heating season is drawing to a close, European inventory levels remain alarmingly low.
Gas storage facilities are currently at 30 per cent capacity, near five-year lows, just as the crucial restocking season is set to begin. Source: Bloomberg Finance LP
As a strategic commodity, natural gas exerts a profound influence on the European economic outlook, given the continent’s heavy reliance on imports. The most severe shocks to the single currency and inflationary pressures were witnessed in 2021 and 2022. Should the current volatility persist beyond the next fortnight, the euro faces the risk of a deeper correction. Furthermore, the European Bank Central could theoretically be forced to revisit interest rate hikes—a move that would be detrimental to the economic recovery and could further undermine the currency.
Inverted axis for EUR/USD. The correlation between gas prices and euro performance remains significant. Sustained high energy costs could drive EUR/USD toward the 1.10 level. Source: Bloomberg Finance LP
It is important to note that Qatar is not Europe’s sole LNG provider. The United States remains the primary supplier, supported by imports from Norway and African nations, including Algeria, Nigeria, and Angola.
EUR/USD is testing key support levels. However, if energy prices continue to climb, the pair could test 1.15 this week, with further downside potential if high costs become entrenched. Source: xStation5
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