European and UK gas markets have traded at multi-month highs this week after peaking within day on Monday to levels not seen this year. Whilst prices are a touch softer a significant risk premium has been built in comparison to where prices were a couple of weeks ago. Supply concerns have mounted with fears related to the Ukraine war and the Middle East conflict. Last week Ukrainian forces entered Russia’s Kursk region, not far from a key transit point that sends the fuel toward Austria and Slovakia. Despite continued fighting in the area, gas flows from Russia to Ukraine through the Sudzha entry point have continued. On Tuesday network operators and gas companies in European countries also said that there were no interruptions to supply, calming the market for now. With only two months till the heating season begins and with top supplier Norway set to start heavy maintenance at the end of August, any unplanned outages would likely spark further volatility leaving Europe’s gas markets in a fragile position. This could come despite ample gas in storage, almost 90% full, and with stable demand as temperatures are set to remain above seasonal norms. Furthermore, we have seen investment funds step up bets that European natural gas prices will climb. The funds’ net-long position in benchmark Dutch gas futures rose 22% on Friday versus a week earlier, according to Intercontinental Exchange Inc. It’s at the highest since 2021, when Russian gas flows started falling short of forecasts, triggering price spikes that later transformed into a region-wide energy crisis. On the contrary should fundamentals remain comfortable over September and no further escalation in Russia/Ukraine or the Middle East, we could see this risk premium erode as we enter Autumn. For those who still have winter positions open risk appetite will be key in making any trading decisions.
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