European gas prices supported by geopolitical risks, not fundamentals By Investing.com

Invgesting.com — UBS Global Research in a note dated Thursday attributed the recent rise in European prices to escalating geopolitical tensions rather than market fundamentals. Prices rose 5% to nearly EUR 39/MWh following clashes near Sudzha, a key transit point for Russian gas in Ukraine.

“While a limited impact on transit flows has been seen so far, market focus has increasingly turned to the potential disruption of gas supplies,” the analysts said.

This renewed focus on geopolitical risk echoes similar concerns that emerged in the Middle East earlier this summer. Together with the onset of the Northern Hemisphere heating season, these factors set a new price threshold at the mid-to-low €30s.

Despite the short-term price increase, UBS believes that fundamental market conditions remain relatively comfortable.

European gas storage levels are significantly above the five-year average, due to high exit stocks from the previous winter and low gas demand. This ample supply acted as a ceiling on potential price increases.

In addition, European gas demand continued to fall, with energy production and industrial consumption both well below previous years’ levels. While Russian pipeline gas deliveries have increased, uncertainty remains over the future of transit contracts, particularly given the potential expiration of the current agreement at the end of the year.

European LNG imports also remained subdued, with Asian buyers absorbing excess supply.

UBS expects gas prices to remain supported by geopolitical tensions in the near term, but expects a return to the low €40 range in the fourth quarter as seasonal demand picks up.

However, market fundamentals suggest downward pressure on prices, with ample storage levels and weak demand acting as counterbalancing factors.