(Bloomberg) -- Traders rushed to snap up protection against surging European gas prices, signaling they expect more disruption to supplies with the heating season less than two months away.
Implied volatility linked to Dutch gas options — a measure of how expensive the underlying derivative contracts are — has jumped in August, indicating fears of supply shortages. Options volume was up 71% last week compared with a year earlier, according to data from Intercontinental Exchange Inc.
The moves mark a notable change in a market where one of the dominant trades this year has been a bet against big swings. With several flash points emerging that could threaten gas supplies — related to both the Ukraine-Russia war and the continuing Middle East conflict — volatility is edging higher.
Traders have been closely watching Ukraine’s recent incursion into Russia’s Kursk region because a gas-transit point there is key to bringing Moscow’s remaining Europe-bound flows to market. While much of the continent has weaned itself off Russian piped gas since the 2022 invasion, a cut to supplies would still be a shock, pushing up prices.
The options wagers allow traders — currently filling up storage ahead of the heating season — to profit from an increase in prices. While Europe’s gas inventories are ample for the time of year following a relatively mild winter, stockpiling more could become more costly if flows to Europe are disrupted.
Ukraine’s incursion into Russia has unsettled traders, who were expecting the fuel to keep flowing through Ukraine at least until the end of the year when a key transit deal expires.
“As we get close to Dec. 31 and if no solution to replace the Russian gas has been found, I would expect the market to get nervous,” said Arne Lohmann Rasmussen, chief analyst at Global Risk Management in Copenhagen. “Even if the parties still relying on that supply moved to secure alternative deliveries, that would still mean less gas in the global system.”
The surge in recent bullish positions is mostly centered on contracts expiring in October, when Europe’s heating season officially starts. Yet there are some indications that the protection trade has gone into overdrive, according to Energy Aspects Ltd. in London.
“Speculative flows are starting to look stretched to the long side,” Nicky Ferguson, EA’s head of quantitative research, said. Some traders are now near maximum long positions, and any additional jolt to volatility could result in some being cut to comply with risk limits, Ferguson said.
--With assistance from Alex Longley.
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