U.K. Natural Gas Options Trading Signals Ukraine Supply Concerns

Options traders are bracing for higher European natural gas prices as the worsening conflict between Russia and Ukraine threatens to disrupt supplies of the fuel this winter.

Three of the four most-active natural gas options are calls giving the holder the right to buy U.K. gas futures in January, February and March at levels at least 20 percent above current prices, ICE Futures Europe data showed. The number of outstanding calls, known as open interest, for all months traded is the highest since ICE listed the contracts in 2011.

More than 2,000 people have died since April in fighting between Ukraine forces and pro-Russian separatists, which risks interrupting gas supplies to the European Union this winter. Russia supplies about 30 percent of Europe’s gas, half of which goes through Ukraine. Disputes between the nations last disrupted flows to Europe in 2009 amid freezing January weather.

“Upside risk in gas is widespread due to geopolitical factors which have been plaguing the market so far this year,” Tobias Davis, a gas broker at GFI Securities Ltd. in London, said by phone yesterday. “Open interest in calls reflects this intrinsic risk. I would expect the landscape to remain unchanged until these factors subside.”

Investors held 9,250 options to buy U.K. gas at 75 pence a therm ($12.50 a million British thermal units) in January as of Aug. 19, exchange data compiled by Bloomberg showed. An identical amount is outstanding for calls with the same strike prices expiring in February and March.

Open Interest

U.K. gas for delivery in January has climbed 25 percent from this year’s low in April to close yesterday at 62.45 pence a therm on ICE. February futures were at 62.52 pence a therm and March traded at 60.67 pence. The U.K. gas market is Europe’s biggest and acts as a regional benchmark.

Call open interest for all months was 200,850 contracts on ICE, the most since 2011. The amount of outstanding puts, or options giving the right to sell futures, was 149,095.

The option with the biggest open interest is a put giving holders the right to sell September gas for 40 pence a therm.

U.K. next-month gas prices have rallied 16 percent after trading at the lowest in four years in July. A mild winter left storage sites across the 28-nation European Union at their fullest for this time of year since 2008. The Ukraine risk premium built into British gas prices is about 5 pence to 7 pence a therm, according to Pira Energy Group, a New York-based research company.

Ukraine passed a bill last week that enables the country to impose sanctions on Russia for its support of separatists in the east. Curbs may include banning transit of Russian gas, which would force European countries to buy the fuel at Ukraine’s eastern border.

“No one wants to be short in a market where long lines of unidentified Russian trucks are piling up on the Ukraine border and the Ukrainian government is making counter-threats to cut off Russian gas in transit,” Pira Energy said in a report e-mailed yesterday. “Ukraine fears mask broadly weak European fundamentals.”

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