European Gas Prices Surge Due to Geopolitical Tensions

UBS Global Research, in a note dated Thursday, attributed the recent rise in European gas prices to escalating geopolitical tensions rather than market fundamentals. Prices increased by 5% to nearly €39/MWh following conflicts near Sudzha, a crucial transit point for Russian gas into Ukraine.

“While there has been limited impact seen in the transit flows so far, market focus increasingly gravitated towards potential gas supply disruption,” said the analysts.

This renewed focus on geopolitical risk parallels similar concerns that arose in the Middle East earlier this summer. Combined with the start of the northern hemisphere’s heating season, these elements have established a new price floor in the mid-to-low €30s.

Despite the short-term price hike, UBS believes fundamental market conditions remain relatively stable. European gas storage levels are significantly above the five-year average, attributed to high exit inventories from the previous winter and low gas demand. This ample supply has acted as a cap on potential price increases.

Moreover, European gas demand continues to decline, with power generation and industrial consumption both well below the levels of previous years. Even though Russian piped gas supplies have increased, uncertainties linger over future transit contracts, especially with the potential expiration of the current agreement at year-end.

European LNG imports also remain subdued, as Asian buyers absorb surplus supply.

UBS anticipates that gas prices will continue to be influenced by geopolitical tensions in the near term but expects a return to the low-€40s range in the fourth quarter due to seasonal demand increases. However, overall market fundamentals suggest downward pressure on prices, with ample storage levels and weak demand serving as counterbalancing factors.