Reopening of Strait of Hormuz Remains Uncertain; European Natural Gas Surges Over 10% Intraday

The prospect of reopening the Strait of Hormuz has once again been clouded, with the European natural gas market being the first to feel the supply risks.

Discussions between Iran and Oman regarding navigation arrangements in the Strait of Hormuz have failed to convince the market that global liquefied natural gas (LNG) transportation can be quickly restored. On Monday, the 10th, local time, European benchmark natural gas futures rose more than 10% intraday, as market participants worried that even if Iran and Oman reach an agreement, the Strait of Hormuz may not immediately resume normal shipping operations.

For Europe, time pressure is mounting. European natural gas inventory is currently just below 59%, significantly lower than the five-year average of about 76% for the same period; there are less than three months remaining until the start of the winter heating season. If the recovery of Middle East LNG supplies continues to be delayed, Europe will not only need to replenish stocks in a shorter timeframe but may also compete with Asian buyers for limited spot LNG resources.

"Agreement Imminent" Does Not Mean Immediate Reopening of the Strait of Hormuz

The market had previously bet on an agreement between Iran and Oman regarding new shipping lanes in the Strait of Hormuz, which drove energy prices down significantly.

However, while stating over the weekend that a relevant agreement was "very close," Iran also sent a key signal: reaching an agreement itself does not mean the Strait of Hormuz will immediately resume normal navigation.

This dampened traders' earlier optimistic expectations for a rapid recovery of Middle East energy supplies.

The Strait of Hormuz is not only a crucial channel for global crude oil transportation but also a vital export route for Middle East LNG to Europe and Asia. For the European natural gas market, the critical factor is not when a paper agreement is signed, but when cargo from major LNG producers like Qatar can stably pass through the strait and arrive in Europe again.

European benchmark Dutch TTF front-month natural gas futures rose to above €62 per megawatt-hour on Monday, marking an intraday gain of nearly 12% as they refreshed their daily high.

This indicates that after natural gas prices retreated on expectations of supply recovery, the market is now re-pricing the risk of continued disruption in the Strait of Hormuz.

European Inventory at Only ~59%, Entering Critical Restocking Window

The biggest problem currently facing the European natural gas market is that the time left for restocking is dwindling.

According to Bloomberg, European natural gas inventory has recently fallen to near its lowest level for this time of year since 2009, with current storage facility fill rates slightly below 59%, far below the five-year average of approximately 76% for the same period. Europe has less than three months before the heating season begins.

Under normal circumstances, Europe increases natural gas inventory during the spring and summer to prepare for peak winter demand. However, this year, the restocking process has come under significant pressure due to supply disruptions in the Middle East.

If the Strait of Hormuz fails to resume stable navigation for an extended period, Europe will need to purchase more LNG in a shorter time to fill the inventory gap.

This also means the European natural gas market may face a more thorny situation: even if the Strait of Hormuz eventually reopens, shipping recovery will not necessarily return to normal levels immediately.

Shipping companies need to confirm route safety, while LNG producers and traders need to reschedule voyages and cargo flows. Therefore, the market is trading not only on "when the strait will open" but also on "how long it will take to restore normal supply after opening."

Europe May Compete with Asia for LNG, Winter Supply Pressure Intensifies

If the recovery of Middle East LNG exports continues to be delayed, competition for LNG between Europe and Asia could intensify further.

Europe currently has low inventory levels and needs to accelerate purchases before winter; meanwhile, major Asian LNG buyers also need to prepare inventory for winter demand.

Citi strategists, including Maggie Xueting Lin, predict that if Middle East LNG exports gradually recover starting in mid-August, European natural gas inventory could reach approximately 74% by the end of October.

However, this prediction relies on an important premise: that Middle East LNG supply can gradually recover. If the recovery is further delayed, Europe's restocking progress could fall short of expectations.

A greater risk stems from winter demand.

Citi strategists also warned that if the El Niño phenomenon leads to unusually cold weather this winter, European natural gas demand could grow more than in previous years, further increasing competition for spot LNG.

In other words, the European natural gas market is currently facing two variables simultaneously: the speed of supply recovery and the intensity of winter demand.

If either variable moves in an unfavorable direction, natural gas prices could experience significant volatility again.

Norwegian Supply Adds Uncertainty, European Natural Gas Market Faces "Internal and External Troubles"

In addition to the Strait of Hormuz, traders are also monitoring Europe's own natural gas supply situation.

The market is watching for potential sustained supply cuts at Norway's Ormen Lange gas field. As Europe's largest pipeline natural gas supplier, any supply disruption in Norway could further amplify price volatility in the European natural gas market.

This means Europe currently faces more than one source of supply risk.

On one hand, the recovery of Middle East LNG exports depends on the situation in the Strait of Hormuz; on the other hand, Norwegian pipeline gas supply also faces potential disruptions. With European inventory below historical levels for this time of year, any additional supply issues could be amplified by the market.

Therefore, although European natural gas prices remain far below the extreme levels seen during the 2022 energy crisis, the market's sensitivity to supply disruptions has increased significantly.

US Natural Gas Also Surges, But Driven by Different Factors

US natural gas futures also rose significantly on Monday, but the logic behind the increase differs from that in Europe.

US natural gas futures rose more than 5% during Monday's US trading session, marking the largest gain in over two months, primarily driven by significant changes in weather forecasts and short covering. Previously, fund managers' bearish sentiment toward US natural gas had reached one of its highest levels since 2020; the sudden change in weather forecasts triggered massive short covering.

Thus, the global natural gas market currently presents different regional drivers:

European natural gas is mainly trading on the Strait of Hormuz, LNG supply, and winter restocking pressure; US natural gas is more influenced by changes in weather expectations and position adjustments.

However, there is a common variable behind both: the supply-demand balance in the global LNG market.

If the Strait of Hormuz cannot resume normal navigation for an extended period and Middle East LNG supply remains constrained, competition between Europe and Asia for LNG from other sources will intensify, and expectations for loose supply in the global natural gas market may be further postponed.

With less than three months remaining until Europe's winter heating season and inventory still significantly below historical levels for this period, any new developments in the Strait of Hormuz could continue to serve as the primary catalyst for European natural gas prices.