— By Dimitrios Koranis — 

The supply shock that emerged in early March, caused by the military escalation between the US/Israel and Iran, and the resulting de facto blockade of the Strait of Hormuz, has had a massive impact on energy markets in Europe. This has significantly restricted the transport of a substantial proportion of global oil and LNG exports.

Europe is affected by this to a far greater extent in the LNG segment than in the oil sector. While the focus was primarily on risk premiums and the prospect of supply shortages until mid-March, we have now reached a point of tangible supply shortages.

TTF (Title Transfer Facility) prices for the front-year 2027 have risen noticeably on average across Europe from around EUR 27-29/MWh to around EUR 44-48/MWh. The trend in prices for the front month (April) is even more extreme, with an average of around EUR 50+/MWh, although on some trading days it even reached just over EUR 60/MWh.

Related: Apparent blockade: China, Russia, and one Greek shipowner move vessels through the Strait of Hormuz

Understandably, there has been greater volatility in the spot market – driven primarily by economic news, including social media posts by US President Donald Trump – although the price level is noticeably closer to the contract price than before.

Several developments on the supply side are occurring simultaneously:

• Transport disruption in the Strait of Hormuz (around 20% of global LNG exports pass through this route). Although the lion’s share has always gone to Asia, Europe’s share has been rising annually, recently accounting for around 15% of the volume.
• LNG tankers passing through the strait are avoiding Europe in favour of Asia; for example, according to vessel tracking data, over 10 LNG tankers carrying a combined total of more than 2 mn m³ of LNG were diverted in the week of 16–22 March.
• Production outages – the world’s largest LNG plant (Ras Laffan in Qatar) has had to halt production. Repairs are estimated to take one year in optimistic scenarios. Pessimistic estimates suggest up to three years.
• Regional production disruptions – production from Israeli gas fields has been shut down.
• Reports of outages in Norway and at Freeport LNG in recent days.

At the same time, the demand side is tightening:

• Asia is taking cargoes due to a higher willingness to pay.
• Europe requires disproportionately high LNG inflows due to low storage levels (approximately 28%–30% fill rate in gas storage facilities in north-western Europe), which is leading to additional demand pressure.
• Regional changes – Egypt, for instance, has itself become an LNG importer due to production outages.

Although Europe sources only a small proportion of its gas from the Middle East and is therefore not directly affected in physical terms, it is subject to supply allocations and arbitrage by countries and suppliers.

Italy is the most exposed. This is partly due to its high gas demand for electricity generation, and partly because, as one of the EU’s largest LNG importers, it is also affected by delivery constraints from its main supplier, Algeria.

The Netherlands, as a gas hub, is equally hard hit. The Gate Terminal in Rotterdam describes itself as Europe’s LNG Hub and supplies both the Dutch and north-western European markets. Physical LNG diversions, price premiums on imported cargoes, and changes in the TTF are causing high volatility in the market.

Related: Iran war supercharges consumer costs

Compared with these countries, the UK is affected more indirectly. Physical dependence is negligible, whereas the price and balancing risk is very high. The UK market remains closely intertwined with the continent via LNG, European interconnectors, and the global price-setting mechanism.

Currently, the geopolitically driven supply shock dominates. Price trends are determined less by traditional fundamentals than by escalation risks. This means very high volatility in the short term, with upside price risks predominating; opportunistic procurement only makes sense during short-term dips. A silver lining: the heating season is over.

A lasting easing of tensions is only likely if tankers can once again sail safely through the Strait of Hormuz, or large quantities of strategic oil reserves are released. Until then, we will have to play it by ear.