This week showed two important indicators that the energy supply sector in the world is under stress. On Monday, spot TTF jumped to the highest level since the winter. TTF is the trading code for the benchmark price of European natural gas. This was followed on Thursday by a surge in WTI above $90/bbl, the highest it’s been since the end of September.

A bump up in energy prices given the high tensions in the Middle East is to be expected. But it’s been more than two weeks now since the deadly Hamas incursion into Israel that started the latest war in Gaza. Crude prices have fluctuated, as fears of escalation rise and fall. But lately the pattern seems to have settled on an upward trajectory.

The First to Notice a Problem

Europe is something of a canary in the coal mine when it comes to the energy situation. The continent must import a substantial amount of energy, almost entirely in the form of fossil fuels. This situation is exaggerated since the war in Ukraine and the continent moving away from importing gas and crude from Russia.

As part of the shake-up, the US has become the chief energy supplier to Europe, being the largest source for LNG and crude. But, Europe still imports a substantial amount of fuel from the Middle East, with Saudi Arabia being the second largest source of crude, and Qatar the second largest source of LNG. That energy transits the Suez Canal, which is within missile distance from Gaza. As if to illustrate the point, a US destroyer in the Red Sea intercepted missiles and drones shot from Yemen targeting Israel by traveling along the route taken by tankers from Saudi Arabia and Qatar to Europe.

Where TTF Comes In

There is a substantial amount of crossover in crude and natural gas, as many power plants have the capacity to use both fuels. If the price of one increases, they can switch to the other. If there is a substantial worry for energy supply in Europe, TTF is typically the first to react, since natural gas is in the tightest supply at the moment.

Europe has inventories above the level they were at the same time last year, which allowed it to get through the winter without major issues. A recent bout of hot weather has helped keep inventories high while the continent continues to frantically build more LNG capacity to import fuel. The recent series of strikes in Australia’s LNG producers – which account for 10% of the global supply – did cause the price to rise. But it was the concern over supply from the Middle East that had the biggest impact on TTF, and subsequently on the price of WTI.

What the Outlook Says

The recent surge in price came after tensions flared up again in the aftermath of an explosion in the parking lot of a hospital in Gaza, with both Israel and Hamas trading accusations of the cause. The initial media reports, heavily suggesting Israel was responsible, precipitated a series of protests across the Middle East and hardened negotiation positions.

Israel is still set to make a ground incursion into Gaza. As long as the conflict is in its active stage, there is always the risk of an unexpected action that could flare up tensions. That could keep the price of crude elevated, due to the risk of supply. Europe’s particularly delicate energy situation and reliance on fuel from the region could make the Euro now more vulnerable to crude price fluctuations. And given Europe’s large import of US crude, a sudden shift in Europe’s buying patterns could also cause extra volatility in WTI – even if the US is not directly affected.

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