(March 13): European natural gas headed for a weekly drop, with many market players pulling back from trading futures after wild price swings and focusing instead on options.
Benchmark futures swung on Friday, with the most recent headlines from the Middle East pushing prices lower. Türkiye said it’s got permission from Iranian authorities for one ship to pass through the Strait of Hormuz, according to state-run Anadolu Agency. Meanwhile, President Donald Trump said the US will be hitting Iran “very hard” next week, but added “hopefully things are going to go very well”.
Markets are focused on any news on Hormuz as they gauge the outlook for energy supplies from the Middle East, but there’s little sign that the war in the region is close to abating. Market players rushed to close previously elevated short positions in European gas right after the conflict escalated, with last week seeing record short-covering among investment funds, according to BloombergNEF.
This week, aggregate open interest in Europe’s benchmark futures fell to the lowest since October, according to Intercontinental Exchange Inc data compiled by Bloomberg, as market players are reluctant to open new positions. Interest in the options market increased with the recent rise in volatility, allowing traders to hedge against violent price swings.
“Extreme volatility conditions have driven a shift in expression of speculative risk to the options market, which has recently attracted huge volumes,” Energy Aspects quantitative analysts including James Portier said in a note this week.
See also: US Treasury allows more Russian oil sales to help tame prices
The war shut down production at the world’s biggest LNG plant in Qatar and has effectively halted traffic through the Strait of Hormuz, cutting off around a fifth of global supply of the super-chilled fuel. The key question for the markets is how long the disruptions will last, with Europe needing large amounts of LNG this summer to refill its depleted inventories.
“The uncertainty surrounding the duration of the war, along with headline-driven volatility, is compelling” traders to scale back activities and actively manage risk exposures, Marco Saalfrank, head of continental Europe merchant trading at Swiss-based Axpo Holding AG, said last week.
The US has said before that its Navy could start escorting tankers through Hormuz by the end of March. The New York Times reported, citing US officials, that Iran has started laying mines in the waterway, which would make shipping even more perilous there. On Thursday, Iran’s deputy foreign minister denied that his country was doing so, according to the AFP.
See also: Japan to sell oil from national reserves at pre-Iran war prices
Dutch front-month futures, Europe’s gas benchmark, traded 2.6% lower at €49.57 a megawatt-hour by 12.59pm in Amsterdam. Prices are on track for a weekly decline of around 7%, following the biggest rally since 2022 in the prior week.
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