Supply disruption compounded by slow replenishment: European natural gas prices have risen by over 40% in the past two months, with options markets betting that winter gas prices could double to 100 euros.

As the ongoing conflicts in the Middle East continue to disrupt supplies, some European natural gas traders have started hedging against possible price spikes in the winter. Trading data from the past week shows that the European benchmark natural gas price could soar to 100 euros per megawatt-hour during the next winter peak demand period, more than doubling from current levels. These bets reflect traders' increasing belief that the prolonged conflict could further complicate Europe's already slow stock replenishment work before the winter. Since the outbreak of the conflict at the end of February, the vital energy supply route of the Hormuz Strait has effectively been blocked, leading to a disruption of one-fifth of the global supply of liquefied natural gas (LNG) and driving up gas prices. Although most of the natural gas from the Middle East usually flows to Asia, this supply interruption has intensified the competition for limited global seaborne natural gas resources. Since the outbreak of the war, the European benchmark natural gas price has risen by over 40%, with the current trading price close to 47 euros per megawatt-hour. While the implied volatility (an indicator based on the cost of options contracts) has fallen from its peak in the first week of the war, it has more than doubled since the beginning of the year. At the same time, as traders increasingly seek protection against rising winter gas prices, the skew of call options for January next year has risen by 4 percentage points in the past week. Currently, the overall fill rate of Europe's vast gas storage facilities is around 34%, significantly below the five-year average of 45% for the same period. Although a decrease in winter stocks and a replenishment in summer are part of a normal cycle, this year's replenishment process has been slow to start. According to data, there have been bullish option spread trades with strike prices of 75 euros and 100 euros from October to March next year over the past week, as well as risk reversal strategies at different levelsbuying 75 euros and 100 euros call options while simultaneously selling 42 euros and 35 euros put options.