The Iran war continues to escalate, and European natural gas prices are expected to rise for the fourth consecutive week.

Due to heightened concerns over supply disruptions from the latest military conflict in the Middle East and the urgent demand for inventory replenishment before the winter heating season, European natural gas prices are expected to record their fourth consecutive week of increases. Despite fluctuations in the benchmark futures prices during trading on Friday, the cumulative increase this week has still exceeded 7%. Recently, with the U.S. and Iran escalating retaliatory military strikes after a brief period of relative calm, both European and Asian natural gas prices have surged to their highest levels in over three years. Shipping through the Strait of Hormuz is hindered, with Qatar's LNG exports nearly at a standstill. Before the conflict, about one-fifth of the world's crude oil and liquefied natural gas (LNG) was transported through the Strait of Hormuz in the Middle East to global markets. While some oil tankers continue to navigate this critical waterway, Qatar's LNG exports through the Strait have effectively come to a halt. The UAE appears to still be loading LNG carriers in the Persian Gulf, but the overall shipping volumes are far below pre-war levels. There are widespread concerns in the market that if the situation escalates further, the energy exports from the entire Gulf region will face a higher risk of disruption. European inventories hit historic lows for this time of year, increasing pressure for replenishment before winter. As the heating season approaches, Europe is facing significant pressures to replenish its natural gas supplies. Currently, the overall filling rate of European gas storage facilities is only about 66%, marking the lowest level recorded for this time of year. The situation is particularly severe in Germany, where the storage level is just 54%, well below the average for this time of year. The unusually low inventory levels mean that even if winter temperatures are normal, Europe may face tight supply conditions. If there is a cold snap or the situation in the Middle East continues to deteriorate, gas prices could surge further. ING Groep NV strategists Warren Patterson and Ewa Manthey noted in their report this week: The escalation in the Gulf region has further delayed hopes for a recovery in LNG exports from the area. They expect that as winter approaches, the competition for LNG between Europe and Asia will intensify, especially given the high likelihood that Qatari LNG will remain absent from the market before the end of the year. Geopolitical premiums remain high, with TTF futures oscillating at elevated levels. As of the time of writing, the benchmark European natural gas priceDutch TTF near-month futureswas reported at 70.78 per megawatt-hour, roughly stable for the day, but with a weekly increase firmly above 7%. Analysts believe that the current gas prices fully reflect the geopolitical risk premium from the Middle East; however, if the conflict continues to escalate or the threat of Iran blocking the Strait materializes, there remains further upward potential for gas prices. Meanwhile, Asian spot LNG prices are also following the upward trend in Europe, with the Japan-Korea-Marker (JKM) breaking through $14 per million British thermal units, reaching a new high for 2023. The competition for limited LNG resources between the two major consumer markets will provide ongoing support for global gas prices this winter.