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Traders have boosted their bets on a rise in European gas prices to the highest level in more than two years, indicating growing concerns about potential disruption to supplies.
Net long positions held by investment funds in futures contracts linked to Europe’s main gas benchmark have soared to 96.4 terawatt hours, worth about €3bn at current prices, according to data from Intercontinental Exchange released on Wednesday. That represents the largest bullish bet since February 2022, days before Russia started its full-scale invasion of Ukraine and made deep cuts to its pipeline gas supplies to Europe, sending prices soaring.
Prices have since fallen dramatically as European economies reduced their gas usage and found alternatives to Russian imports, helping to fill storage facilities close to record levels. But those efforts have left the continent more reliant on the often volatile global market for liquefied natural gas.
Already in recent months, there have been disruptions at exporting facilities in the US and Australia, two big LNG producers. Investment funds have been building up their long positions since the start of Israel’s war in Gaza in October, which led to concerns about the transport of LNG through the Red Sea, where 13 per cent of Europe’s LNG supply passed last year, and other Middle Eastern waters.
“Funds are taking into consideration a possible reduction in LNG flows passing through two key straits” of Bab al-Mandab and the Strait of Hormuz, said Tom Marzec-Manser, head of gas analytics at ICIS, a consultancy. “There is upside risk and therefore a rationale for taking a long position.”
The European gas benchmark traded at about €30 per megawatt hour on Wednesday. While that is far below the peak of more than €300/MWh in the summer of 2022, it remains higher than about the €10 to €20/MWh typically seen before the gas crisis started in 2021.
Bullish bets by speculators come despite the EU’s gas storage being 63.8 per cent full as of Monday, the second-highest level on record for this time of year.
Most traders and analysts believe the EU will not have a problem refilling its gas storage facilities ahead of winter when demand rises. But they do not rule out further big price swings, particularly with gas demand rebounding recently, having remained subdued during the energy crisis.
Analysts at Morgan Stanley said “underlying gas demand” in April was up 8 per cent on the same month a year earlier.
There is also uncertainty over the future of the remaining Russian pipeline gas that reaches the EU via Ukraine. A deal between Kyiv and Moscow to allow for the transit, which accounts for about 5 per cent of the bloc’s supplies, expires at the end of this year. Ukraine has expressed its intention to not renew the deal.