Europe Confronts Another Energy Shock

Since the start of the war with Iran, investor attention has understandably centered on crude oil. The effective closure of the Strait of Hormuz removed roughly 15 million barrels of crude per day from the supply chain, representing nearly 20% of global supply, according to the International Energy Agency. Combined with damage to regional energy infrastructure, the resulting supply shock has pushed Brent crude above $100 per barrel and sent inflationary waves through the global economy.

Tanker traffic through the Strait has recently rebounded toward prewar levels. However, continued attacks on vessels and energy infrastructure, along with the risk of the conflict broadening beyond the Persian Gulf, have left investors with little confidence that supply will sustainably normalize anytime soon.

Outside of the crude oil market, a second energy crisis has emerged in liquefied natural gas (LNG). European gas prices, measured by the benchmark Dutch Title Transfer Facility (TTF) contract, have surged nearly 200% this year as global supplies tightened. Before the war, nearly 20% of global LNG supply moved through the Strait of Hormuz, leaving the market especially vulnerable to its closure.

Oil exporters have partially mitigated the disruption through bypass pipelines and ship-to-ship transfers, but LNG is much harder to reroute. Transferring LNG between vessels is operationally complex and relatively rare, while Qatar and the United Arab Emirates have limited alternatives for moving LNG exports out of the Persian Gulf. And while vessel-tracking data have shown some improvement in LNG traffic, flows remain well below prewar levels and the timing of a full recovery remains highly uncertain.

European Natural Gas Prices Soar as Middle Eastern Supply Remains Restricted

Source: LPL Research, Bloomberg 10/12/26Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Any commodities, options or futures referenced are being presented as a proxy, not as a recommendation.

Structural Shift in Europe’s Supply Mix

The latest supply shock follows a notable transformation in Europe’s natural gas supply chain. Before Russia’s invasion of Ukraine, Europe relied heavily on relatively inexpensive and predictable Russian pipeline gas. However, after the war broke out in 2022, Russia was hit with strict economic sanctions and as a result, they essentially weaponized their energy assets by restricting supply to Europe for political leverage. The European Union also adopted legislation last year to phase out their reliance on Russian gas by fourth quarter of 2027.

While this removed one geopolitical dependency, it also created another one. Much of the lost pipeline supply has been replaced by seaborne LNG, making Europe more exposed to global spot prices, shipping constraints, geopolitical chokepoints, and competition from Asian buyers. Pipeline gas represented roughly 52% of European imports in 2025, down from 76% in 2021, while LNG’s share nearly doubled from 24% to 48% over the same period.

European Gas Supply Mix by Source

Source: LPL Research, Bloomberg 10/12/26. Based on Bloomberg estimates using billion cubic meters (bcm). Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Any commodities, options or futures referenced are being presented as a proxy, not as a recommendation.

Subdued Storage Levels Raise Winter Risk

The combined impact from limited flows of LNG through the Strait of Hormuz and loss of Russian pipeline supply has become apparent in European storage levels. Europe is now entering the winter with gas supply running 20% below the seasonal average for this time of year. With withdrawal season right around the corner, a colder-than-expected winter in Europe could pull inventory levels to critically low levels, especially if LNG from Qatar and the United Arab Emirates remains trapped in the Persian Gulf.

Even a mild winter would not eliminate the risk of higher prices. Europe will likely still need to rebuild inventories from a depleted starting point ahead of the following heating season. That could sustain demand for LNG through the spring and summer, creating a higher floor under European gas prices and intensifying competition with Asian buyers.

European Gas Storage is Running Historically Low

Source: LPL Research, Bloomberg 10/12/26. Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Any commodities, options or futures referenced are being presented as a proxy, not as a recommendation.

Conclusion:

Europe has diversified away from Russian pipeline gas, but it has not eliminated its external energy dependence. Instead, the region has exchanged its reliance on Russia for greater dependence on global LNG markets, introducing new risks tied to spot prices, shipping constraints, geopolitical chokepoints, and competition for supply.

The disruption to LNG exports through the Strait of Hormuz is exposing the vulnerabilities of their new supply model. Low storage levels, constrained Middle Eastern supply, and the approaching winter mean Europe is paying a premium to secure cargoes. A rebound in Chinese or broader Asian demand would intensify that competition, potentially pulling supply away from Europe and pushing prices higher.

The outlook for European natural gas prices remains skewed to the upside, with low inventories likely to keep prices elevated and volatile throughout the winter. Even if weather conditions are mild and LNG flows improve, the need to rebuild depleted inventories could establish a higher price floor into next year.

The immediate risk of physical shortages appears lower than during the 2021–2022 crisis because Europe has expanded its import infrastructure, reduced gas consumption, and become more reliant on U.S. LNG supply. The more significant threat is economic. Persistently high gas prices could raise household energy bills, erode purchasing power, pressure energy-intensive industries, weaken growth, and keep inflation above the European Central Bank’s (ECB) target. That combination could leave the ECB facing an uncomfortable higher-for-longer policy environment, further weighing on economic activity. Within equities, LPL Research continues to recommend overweighting the U.S. while maintaining a cautious outlook on Europe.