Mideast tensions risk 130% jump in EU gas prices, Goldman Sachs warns

Fresh concerns over global energy security, fueled by geopolitical tensions in West Asia, could lead to a dramatic increase in European natural gas prices.

Goldman Sachs Group estimates that a one-month halt of shipping through the Strait of Hormuz could cause prices to more than double.

Goldman Sachs analysts, led by Daan Struyven, stated in a Sunday note that benchmark gas prices in Europe and Asia have barely reflected a significant risk premium related to Iran. 

About 20% of the global liquefied natural gas (LNG) supply, largely originating from Qatar, travels through the constrained channel between Iran and Oman.

The bank's estimate suggests that a one-month disruption could cause a significant spike in European gas prices and Asian spot LNG.

Prices could increase by up to 130%, reaching approximately $25 per million British thermal units (mmBtu).

“A hypothetical longer disruption of natural gas supply transit through the Strait of Hormuz lasting more than two months would likely lift European natural gas prices above €100 per megawatt-hour ($35/mmBtu) to trigger more significant global gas demand destruction,” the analysts wrote.

At the time of writing, the ICE Dutch TTF natural gas prices were nearly 20% higher at 38.185 Eur. 

Risk premium

Markets are currently anxious due to rising tensions involving Iran, Israel, and the United States.

Although oil prices have recently experienced a sharp increase, Goldman Sachs noted that European and Asian gas markets have not yet consistently priced in this sustained geopolitical risk.

Europe's benchmark gas, Dutch TTF, has stayed considerably lower than the record high levels observed in 2022 following Russia's invasion of Ukraine, when its price temporarily exceeded the equivalent of $100/mmBtu.

A significant, extended disruption at the Strait of Hormuz, according to analysis by Goldman Sachs, could trigger a supply shock analogous to past events. 

This impact would be particularly severe for Europe, which has become increasingly dependent on imported LNG following the reduction of Russian pipeline gas supply.

The primary impact on gas markets will be on LNG prices in Europe and Asia.

With approximately 20% of the world's LNG supply at risk, European gas prices are likely to see significant increases.

As we near the end of the European heating season, gas storage is below 30% full.

“This leaves the market tight. Given the potential for disruptions from the Persian Gulf, we could see increased competition between Europe and Asia for alternative supplies,” Warren Patterson, head of commodities strategy at ING Group, said in a note.

“While there’s been a ramp-up in LNG export capacity and more to come, particularly from the US, this would not come soon enough to offset potential losses from the Persian Gulf,” Patterson added. 

US prices see limited upside

Additionally, Goldman Sachs noted that the effect on US natural gas prices is expected to be minimal. 

The US is a significant net exporter of LNG, but its existing liquefaction plants are already operating near maximum capacity.

This constraint severely limits the ability to quickly increase exports.

Consequently, US domestic gas markets might remain relatively protected, even if global LNG benchmarks experience sharp increases.

The global LNG market faces challenges in managing disruptions, despite emerging from a tight period. 

Although significant US LNG export capacity is set to come online in the near future, including some this year, this new capacity will be insufficient and too late to counteract the potential volume losses from Qatar and the UAE, according to ING’s Patterson.

“Instead, higher prices will need to persist in an attempt to try to balance the market through demand destruction.