(Bloomberg) -- European natural gas closed near the highest level this year as geopolitical tensions escalated, with Ukraine’s forces firing British cruise missiles at military targets inside Russia for the first time.
Benchmark futures gained 2.5% to settle at €46.80 per megawatt-hour. The UK equivalent rose 2.1%.
Kyiv’s strike came after the UK approved Storm Shadow missiles in response to Russia deploying North Korean troops against Ukraine. The British government considered the move by Moscow to be an escalation of the conflict, according to a person who spoke on condition of anonymity.
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European gas prices are reactive to geopolitical events, tracking crude oil. While supplies of Russian gas via Ukraine to Central Europe continue as normal for now, traders are watching for any changes to the status quo — especially after Gazprom PJSC cut off its longest partner, OMV AG, and as a transit deal between Kyiv and Moscow expires at the end of this year.
Europe looks well supplied — with more liquefied natural gas cargoes diverting toward the region amid the rally — but the market remains tight as the heating season gets under way.
The fragile market balance means external factors will have significant sway over prices, Equinor ASA Chief Financial Officer Torgrim Reitan said in an interview on Bloomberg TV on Wednesday.
In a sign of increased supply concerns, investment funds boosted their bullish bets on European gas. The funds’ net-long position in benchmark Dutch futures surged 21% last week, according to data published by the Intercontinental Exchange Inc. on Wednesday.
Asian LNG demand is relatively muted at the moment, and should the region also increase purchases, Europe would be exposed to further upside risks, Inspired Plc said in a note.
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