The outlook for reopening the Strait of Hormuz has darkened again, with the European gas market first to feel the supply risk.

Discussions between Iran and Oman regarding Strait of Hormuz transit arrangements have failed to convince the market that global LNG shipments can resume quickly. On Monday, European benchmark gas futures surged more than 10% intraday, as concerns grew that even if an agreement is reached, normal shipping through the Strait might not resume immediately.

For Europe, time pressure is mounting. European gas storage sits at just under 59% of capacity, significantly below the five-year average of about 76% for this time of year, with less than three months until winter heating season starts. If Middle East LNG supply recovery continues to stall, Europe will need to replenish inventories in a shorter timeframe and may also compete with Asian buyers for limited spot LNG cargoes.

Agreement "Near" Does Not Mean Immediate Reopening

Markets had previously bet on an Iran-Oman deal for a new Strait of Hormuz shipping corridor, which drove energy prices sharply lower. However, Iran stated over the weekend that while a deal is "very close," it also signaled a key point: reaching an agreement does not automatically mean the Strait will return to normal traffic immediately. This has dampened trader optimism for a rapid recovery in Middle East energy supply.

The Strait of Hormuz is not just a critical crude oil transit route but also a key export channel for Middle East LNG heading to Europe and Asia. For the European gas market, the crucial factor is not when a deal is signed, but when cargoes from major LNG producers like Qatar can reliably transit the Strait to Europe again. The European benchmark TTF near-month gas futures hit a daily high on Monday above 62 euros per megawatt-hour, gaining nearly 12% intraday. This means that after prices fell on expectations of supply recovery, the market is now repricing the risk of a sustained disruption in the Strait.

European Storage at ~59%, Critical Replenishment Window

The biggest challenge for the European gas market is the diminishing time left to refill storage. According to Bloomberg, European gas storage has recently fallen to near its lowest level for this time of year since 2009. Storage facilities are just under 59% full, well below the five-year average of about 76%. The region is now less than three months away from the start of the heating season. Under normal conditions, Europe would build gas inventories during spring and summer in preparation for peak winter demand. But this year, due to the Middle East supply disruption, the replenishment process is under significant strain. If the Strait of Hormuz cannot resume stable shipping, Europe will need to procure more LNG in a shorter period to fill the storage gap. This also means the European gas market could face a more complex situation: even if the Strait eventually reopens, shipping will not necessarily return to normal levels immediately. Shipping companies need to confirm route safety, and LNG producers and traders need to reschedule cargoes and logistics. Therefore, the market is trading not just on "when the Strait opens," but also on "how long it takes for supply to normalize after reopening."

Europe May Compete with Asia for LNG, Winter Supply Pressure Mounts

If Middle East LNG exports continue to be delayed, competition between Europe and Asia for LNG could intensify. Europe's low storage levels already necessitate accelerated procurement before winter, while major Asian LNG buyers also need to build inventories for winter demand. Strategists at Citigroup, including Maggie Xueting Lin, predict that if Middle East LNG exports begin a gradual recovery from mid-August, European gas storage could reach around 74% by the end of October. However, this forecast hinges on the crucial assumption that Middle East LNG supply can gradually resume. If the recovery is delayed further, Europe's replenishment progress could fall short of expectations. A greater risk lies in winter demand. The Citigroup strategists also warned that if El Ni帽o leads to unusually cold weather this winter, European gas demand could see higher-than-normal growth, further intensifying the scramble for spot LNG. In other words, the European gas market currently faces two variables: the speed of supply recovery and the intensity of winter demand. If either variable moves in an unfavorable direction, gas prices could see significant volatility again.

Norwegian Supply Adds Uncertainty, European Gas Market Faces "Troubles at Home and Abroad"

Beyond the Strait of Hormuz, traders are also monitoring Europe's own gas supply situation. The market is watching for possible sustained supply cuts from the Ormen Lange gas field in Norway. Norway is Europe's largest pipeline gas supplier, and any supply disruption could amplify price volatility in the European gas market. This means Europe currently faces more than one supply risk source. On one hand, the recovery of Middle East LNG exports depends on the situation in the Strait of Hormuz; on the other, Norwegian pipeline gas supply faces potential disruptions. With European storage below historical levels for this time of year, any additional supply issues could be magnified by the market. Therefore, while European gas prices remain far below the extreme levels seen during the 2022 energy crisis, market sensitivity to supply disruptions has clearly increased.

US Natural Gas Also Rallies, But for Different Reasons

US natural gas futures also saw a significant rise on Monday, though the logic behind the rally differs from Europe's. US gas futures surged over 5% during US trading hours on Monday, marking their biggest gain in over two months. This was primarily driven by a major shift in weather forecasts and short covering. The level of bearishness among fund managers toward US natural gas had reached one of its highest levels since 2020. When weather forecasts suddenly changed, it triggered a large-scale short squeeze. As a result, the global gas market currently shows different regional drivers: European gas is primarily trading on the Strait of Hormuz, LNG supply, and winter replenishment pressure; while US gas is more influenced by weather forecast changes and positioning adjustments. However, both share a common variable: the global LNG market balance. If the Strait of Hormuz remains unable to return to normal traffic for an extended period, limiting Middle East LNG supply, competition between Europe and Asia for other LNG sources will intensify, and expectations of a looser global gas supply could be further delayed. With less than three months until the European winter heating season and storage still significantly below historical levels, any new developments in the Strait of Hormuz are likely to remain a key catalyst for European gas prices.