Although it has not turned into a full-blown rally, the rally that started last week in gas has continued. The reason is another geopolitical flare-up, but the Middle East is not causing the problems this time.
However, the latter could contribute to the situation if fears prove true and Iran, directly or through its ally Hezbollah, ends up attacking Israel or, worse, disrupting the Strait of Hormuz.
The recent price increase is due to the Russian-Ukrainian conflict, specifically Ukraine's attack on the Kursk region, and concerns about disruptions in the operation of the Sudzha GIS.
To explain why this is important, this is the last transit channel to Europe for Russian gas through the Ukrainian gas transportation system. Although the stakes are not critical, they are significant.
According to The Wall Street Journal, the Sudzha gas metering station accounts for 3% to 5% of Europe's gas supply, most of which goes to Central European countries (Austria, Slovakia, and Hungary).
But how realistic are these concerns?
It is a tricky question. If the goal were to stop gas flow, it could be as simple as closing a valve. Moreover, the contract for this transit ends this year, so that we can hope for the best.
On the other hand, Russia could destroy the pipeline itself to regain lost territories. At this point, anything is possible, so the European natural gas market remains in risk mode.
As to whether Russia, in a worst-case scenario, could divert gas through Turkey, this is only possible for a part of the volume and would require the creation of a Turkish gas hub.
The good news is that, as mentioned above, due to the small volume of fluctuations above $1,000 per cubic meter, we are unlikely to see significant changes even if the flow is interrupted.
Another issue is that some countries, especially Hungary and Slovakia, rather than Germany, could face economic problems due to the disruption of natural gas supplies, ultimately impacting the EUR to USD pair.
What to expect on the gas market?
If the situation with the Sudzha gas metering station miraculously resolves without it being destroyed, prices could return to normal. However, this scenario seems less and less likely every day.
Overall, volatility seems to be returning to the energy markets. The question now is to what extent it will affect, and whether it will affect, eurozone headline inflation and, subsequently, the ECB's plans to cut rates.