Bullish Bets on Europe Gas Options Signal Supply Worries Linger

(Bloomberg) -- Natural gas options are signaling European traders still see upside risk for prices, even after concerns linked to the Middle East have receded.

The cost of insuring against price spikes or troughs is still hovering near the highest since the start of the heating season, showing investors continue to place bets that prices will rise.

Gas traders have turned to the options market to hedge against a plethora of risks this winter, including steeper competition with other parts of the world for liquefied natural gas cargoes and the upcoming end of a Russia-Ukraine transit agreement. The escalation of the conflict in the Middle East and sudden increases in demand due to cold weather also played a role. 

Now, with Middle East risks appearing to fade, traders are focusing on the other concerns to justify their bullish conviction. That’s in contrast to the oil market, where a recent splurge into options bets on speculation that Middle East attacks could disrupt flows turned worthless.

The direction of the skew —  showing a premium of bullish call options over bearish puts — comes as futures trade near their highest levels this year. Unexpected supply outages from Norway to the US threaten to increase withdrawals from the region’s brimming storage facilities.  

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