THOMAS KIENZLE

European benchmark Dutch TTF gas futures surged by nearly 6 per cent at one point on Monday (September 14), climbing above €83 per megawatt-hour and reaching their highest level since the European energy crisis of 2022-23. On the surface, the immediate trigger was Europe’s gas storage rate falling to 68 per cent, well below the five-year average of more than 80 per cent for this point in the year. But the latest information makes clear that what is truly unnerving the market is not simply a physical storage shortfall, but a Gulf military conflict that has lasted more than six months and shows no sign of a ceasefire.

The Gulf conflict: the real driver of prices

Since the United States and Israel launched military strikes on Iran under the code name “Epic Fury” at the end of February this year, the Strait of Hormuz — a crucial waterway carrying about one-fifth of global liquefied natural gas (LNG) trade — has been subject to intermittent blockades. QatarEnergy’s LNG production facilities at Ras Laffan were hit by missile and drone attacks in March, severely damaging two production units. The International Energy Agency (IEA) estimates that repairs will take three to five years, effectively wiping out about 17 per cent of Qatar’s annual LNG export capacity on a permanent basis.

The situation has not eased with time; it has escalated in recent days. Saudi Arabia’s East-West pipeline — the kingdom’s only land-based alternative route for exporting crude while bypassing the Strait of Hormuz — was temporarily shut down last Thursday (September 10) after several pumping stations were hit by drone attacks. The following day, Yemen’s Houthi forces also took control of the Bab el-Mandeb Strait at the southern end of the Red Sea, cutting off the alternative route for Saudi oil tankers travelling through the Red Sea to the Indian Ocean. In other words, the Gulf’s two main backup routes for energy exports are under pressure at the same time, leaving the market with almost no room to manoeuvre. Hiroo Kada, president and chief executive of Japan’s biggest power producer and one of the world’s largest LNG buyers, JERA, warned publicly on Monday that the disruption to shipping through the Strait of Hormuz could last longer. The remarks were seen by the market as a direct signal that Asian buyers would step up purchases of spot cargoes.

Depleted storage: an amplifier of wartime risk, not an independent cause

Against this backdrop, Europe’s already low storage level has become a vulnerability amplifying the risk, rather than an independent trigger. Data from Gas Infrastructure Europe (GIE) showed that EU storage facilities were 68.04 per cent full as of September 13, with inventories of about 72.6 billion cubic metres. That was roughly 16 to 17 percentage points below the five-year average and among the lowest levels on record for this time of year. By mid-September in previous years, storage rates had generally approached the final stage of filling, at around 75 per cent. But as spot prices have remained elevated by geopolitical risk premiums this year, the traditional strategy of “buying cheap gas in summer and selling it at a higher price in winter” has clearly broken down. Operators have been less willing to inject gas, slowing the pace of replenishment. This, too, is an outcome of the conflict’s impact on gas prices, rather than a phenomenon unrelated to it.

Spilling into the economy: direct pressure on inflation and interest rates

Higher energy costs have already been reflected in eurozone inflation figures. Inflation in the euro area stood at 3.3 per cent in August, driven mainly by energy prices. Markets have now almost fully priced in expectations that the European Central Bank will raise interest rates by a quarter of a percentage point on Thursday, with the deposit rate potentially increasing from 2.25 per cent to 2.5 per cent. This means the surge in gas prices is no longer merely a matter of energy bills; it is directly influencing the eurozone’s entire monetary policy path.

Pressure on industry is also becoming more tangible. Energy-intensive sectors such as chemicals, glass and fertilisers were already constrained by Europe’s relatively high industrial electricity and gas prices. If average prices remain above €80 per megawatt-hour through the winter, the operating headroom of some small and medium-sized enterprises will narrow further. Multinational chemical companies have previously warned that they may cut production capacity in Europe.

What to watch: four variables

Four factors will determine the direction of TTF prices over the coming months:

First, diplomatic developments surrounding the Strait of Hormuz. Iran and the Gulf Arab states had been due to hold talks on arrangements for shipping through the strait on Monday (September 14), but the meeting was postponed at the last minute. Iran’s foreign minister has made clear that Tehran will not reopen the strait unless the United States meets its demands, making a breakthrough in the short term unlikely;

Second, the actual pace of repairs to Qatar’s LNG capacity. Because the damage to the Ras Laffan facilities could take three to five years to repair, the resulting shortfall is structural rather than seasonal;

Third, the intensity of spot-market buying by Asian customers. If buyers in China, Japan and South Korea increase purchases before winter, they will directly raise Europe’s cost of competing for cargoes. Goldman Sachs has forecast that if Middle Eastern exports recover only slowly, December TTF prices may need to rise above €100 to attract LNG cargoes to Europe, far above its previous baseline assumption of €50;

Fourth, temperatures in the Northern Hemisphere this winter. A prolonged cold spell would add demand-side pressure to already tight supplies and trigger another sharp price increase.

The Gulf energy crisis, which began in March this year and has now entered its seventh month, shows no clear path towards easing in the near term. Europe’s depleted gas storage is merely laying bare the war risk already embedded in gas prices.