European gas prices rise on fears of global supply disruption

The European gas price hit its highest level since March, as traders feared that the global energy supply would be affected by disruptions to pipelines and conflict between Israel and Hamas.

Since the Hamas-Israel attack last weekend, the price of futures contracts on Dutch gas, a European benchmark, has risen by as much as 14,2 percent to €53 per Megawatt Hour. This represents a gain of more than 30%.

These moves are the latest shock to a market which has been volatile ever since Russia invaded Ukraine last year. Prices have dropped from their peak of over €300 per megawatt-hour in August 2022. Europe has also largely stocked up on gas in preparation for the winter to cushion it from any further disruption.

But continued increases will drive up prices once winter stocks on the continent are depleted. Oil markets are largely ignoring the effects of the Israel-Hamas war, but traders are worried about the threat to global supplies.

Finland suspects that a pipeline was damaged by sabotage, while Australia’s workers are still on strike.

In a Thursday note, Edward Gardner, an economist with Capital Economics and a commodities expert, said that gas prices had risen because of lower supplies, but arguably even more important, supply risks. “Perhaps, the greater concern is the possibility that the Hamas/Israel conflict will morph into a wider regional conflict,” said Edward Gardner, a commodities economist at Capital Economics. On Monday, Israel’s energy ministry ordered US major Chevron to temporarily suspend operations at the Tamar gasfield, the closest of three Israeli offshore gas projects to Gaza, due to security concerns.

Capital Economics estimates that Tamar is responsible for half of Israel’s annual production of more than 20 billion cubic metres. Israel’s domestic gas consumption is largely accounted for, but about a third of its production is shipped via pipeline to Egypt before reaching global markets. Israel is also a major supplier of LNG to Europe.

Israel will have to struggle to continue exporting natural gas by pipeline to Egypt if Tamar is offline. Egypt’s LNG sales to the global market will not recover much from a seasonal slump, Gardner said.

He added that the production at Israel’s second major gasfield near Lebanon could also be halted if the Middle East conflict expanded.

In northern Europe, traders are worried that the leak discovered on Sunday in a 77km long Baltic Sea gas pipe between Finland and Estonia could have been caused by sabotage.

The geopolitics behind the leakage of the [Baltic] gas pipeline is driving the price increases, not the lack of supply of gas to the market, said Tom Marzec Manser, the head of gas analysis at ICIS, a company that provides energy market intelligence.

The Finnish President Sauli Niinisto discussed the damage caused with Jens Stoltenberg. Finland is also working to find out the reason behind the leak and a broken data cable that connects Finland and Estonia.

Marzec Manser stated that the lack of clarity about the cause of the leak had created “a great deal of nervousness” in the traders.

Australian employees have also threatened to strike at the liquefied gas plants operated by US giant Chevron, adding to global concerns about supply.

The dispute highlights how European gas prices are being affected by global LNG markets as Europe weans itself from cheap Russian gas. Workers at the Gorgon & Wheatstone LNG facilities are involved in a dispute over pay. These two plants account for approximately 7 percent of global LNG supplies.