(Bloomberg) -- European natural gas prices edged higher as Middle East tensions brought a fresh wave of volatility to the market.
Benchmark futures rose as much as 2.2% on Monday, following moves in oil and offsetting Friday’s losses. Markets are bracing for the possibility that an escalation of Israel-Iran hostilities may spark a wider regional conflict, which could affect supply of the heating fuel.
A Hezbollah drone exploded next to Israeli Prime Minister Benjamin Netanyahu’s private home on Saturday, and Israel opened up a fresh military assault on Hezbollah strongholds in Lebanon the following day. Israel has already vowed to retaliate against Iran for a missile attack at the start of October.
Geopolitical concerns have kept prices volatile in recent weeks, highlighting the vulnerability of Europe’s fuel supplies as the region’s heating season gets underway. For gas markets in particular, a key concern lies around the risk of a closure to the Strait of Hormuz, the gateway to the Persian Gulf and an important waterway for liquefied natural gas and oil shipments.
Chevron Corp., the operator of Israel’s Leviathan and Tamar offshore projects said on Monday that their facilities in the country are working as normal. “We are supplying natural gas to our customers in Israel and the region from both the Leviathan and Tamar reservoirs,” spokesperson Sally Jones said in an email.
“Expectations of an Israeli response to the 1 October attack are still hanging over markets, which is amplifying the already tight winter outlook for European gas markets,” said Florence Schmit, a European energy strategist at Rabobank. “This is keeping the Dutch benchmark gas market in the €39-40 a megawatt-hour range until we can get a clear sense of where geopolitics will drive prices.”
In addition, a cold snap is expected to take hold of the region at the end of the month, testing the region’s energy infrastructure and its hefty storage facilities. London, Paris and Berlin are set to see temperatures drop below seasonal norms next week, according to a Bloomberg model of weather forecasts.
For now, Europe appears well supplied, with more LNG deliveries landing on its shores. Pipeline flows from Norway have also rebounded.
Dutch front-month futures, Europe’s gas benchmark, rose 2.0% to €39.97 a megawatt-hour at 10:26 a.m. in Amsterdam.
--With assistance from Anna Shiryaevskaya.
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