The recent increase in prices across Europe has been attributed to escalating geopolitical tensions rather than market fundamentals, according to UBS Global Research. Prices have surged by 5% to nearly €39/MWh following clashes near Sudzha, a key gas transit point from Russia to Ukraine.
Analysts noted, “While the impact on gas transit flow remains limited so far, the market is increasingly focused on the potential for disruptions in gas supply.”
This new focus on geopolitical risk reflects similar concerns that emerged in the Middle East earlier this summer. Coupled with the onset of the heating season in the northern hemisphere, these factors have established a new price floor ranging from mid to low €30s.
Despite the short-term price hikes, UBS believes that market fundamentals remain relatively comfortable.
Europe’s gas reserves are significantly higher compared to the five-year average, thanks to high inventory levels from the previous winter and reduced gas demand. This ample supply has acted as a constraint on price increases.
Furthermore, Europe’s gas demand continues to decline, with electricity generation and industrial consumption both significantly lower than in previous years. While Russian pipeline gas supply has increased, there are still uncertainties regarding the future of transit contracts, especially as current agreements may expire by the end of the year.
Europe’s LNG imports also remain low, as Asian buyers absorb the surplus supply.
UBS expects gas prices to continue to be supported by geopolitical tensions in the near term, but anticipates a return to sub-€40 levels in Q4 as seasonal demand picks up.
However, overall market fundamentals indicate downward price pressure, with abundant reserves and weak demand acting as balancing factors.
