European LNG prices surge to a more than three-year high, with the Strait of Hormuz supply disruption casting a shadow over winter supply.

European liquefied natural gas (LNG) prices rose to their highest level in over three years this week, as the impact of the Middle East conflict on the global energy supply chain becomes increasingly apparent. The obstruction of the Strait of Hormuz and low European inventories have sharply increased market concerns about tight supply this winter.

According to Argus Media data, spot LNG prices in Northwest Europe rose to $22.83 per million British thermal units (MMBtu) earlier this week, more than double the price a year ago, reaching a new high since January 2023. Meanwhile, the Asian LNG benchmark price, Platts JKM, rose 13% cumulatively in August.

The soaring prices are putting multiple pressures on the market: European and Asian buyers are vying for limited supplies, further pushing up global prices; Goldman Sachs warned in a research report released on Sunday that the European benchmark gas price needs to rise to more than 100 euros per megawatt-hour to "more significantly curb Asian LNG demand," while the current contract price is about 66 euros per megawatt-hour, which means that there is still considerable room for prices to rise.

LNG transport nearly ground to a halt due to obstruction at Hormuz.

The Middle East conflict was the direct trigger for this round of LNG price surges. The Strait of Hormuz typically handles about one-fifth of the world's LNG supply, but the number of ships passing through it plummeted after the conflict broke out. According to Kpler data, only eight LNG carriers left the strait in July, compared to an average of about three per day before the conflict.

The situation deteriorated further this week. Iran's Persian Gulf Straits Authority threatened on Sunday to fine or confiscate dozens of vessels, with a blacklist including 46 ships, among them 10 LNG carriers. Martin Senior, head of pricing at Argus LNG, stated that market confidence in the near-term resumption of navigation in the Strait of Hormuz is waning.

Compared to crude oil, natural gas transportation is more directly impacted. Crude oil transport vessels are relatively versatile, and some tankers have continued to leave the Gulf in recent months; however, LNG transportation is highly dependent on specialized vessels and supporting infrastructure. Once key shipping lanes are blocked, alternative transportation options are significantly limited, and the risk of supply disruption is much higher.

European inventories are low, and restocking continues to lag behind.

Europe is becoming one of the most vulnerable markets in this round of supply shocks. Before the conflict, European natural gas inventories were already below the levels of the same period in previous years; after the conflict, in order to maintain current supply, Europe further slowed down gas injection, resulting in a continued lag in restocking.

According to data from Gas Infrastructure Europe, the average daily net gas injection in Europe in August was only 3 terawatt-hours, lower than the 3.6 terawatt-hours in the same period last year. Currently, German gas storage facilities are only about 50% full. According to German regulations, if private companies do not fully utilize their reserved storage capacity, the government must intervene to purchase and store the gas.

The risk of low inventory levels has been a persistent concern in the market for months. Meanwhile, natural gas futures prices are expected to remain largely flat in the coming months, further compressing the arbitrage opportunities for stockpiling during the off-season and selling at higher winter prices, thus weakening traders' incentive to actively replenish their inventories. With winter approaching, the market is closely watching whether European policymakers will intervene.

Asian demand has become another key variable determining the direction of global gas prices. In the early stages of the conflict, Asian buyers proactively reduced LNG imports, which to some extent alleviated the competition for supplies between Europe and Asia; however, as the situation persisted, the willingness of Asian economies to purchase gas rebounded, and the supply-demand gap in the global LNG market is further tightening.

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