Delayed Resumption of Strait of Hormuz Transit May Require Further European Gas Price Increases to Compete for LNG

Overview

The report examines how a slow recovery in LNG transit through the Strait of Hormuz is changing LNG flows among Europe, the US, and Asia. Goldman Sachs believes that the recent rise in TTF has begun to address Europe's supply shortfall by curbing Asian demand and attracting flexible US cargoes to Europe, but current prices remain insufficient to resolve the winter storage issue. If the recovery in Persian Gulf exports continues to be delayed, European natural gas prices will need to rise further to drive additional demand adjustment and cargo redirection.

Core views

Goldman Sachs previously argued that, absent an improvement in LNG exports through the Strait of Hormuz, European TTF prices would have to rise to weaken Asian LNG demand and free up more spot cargoes for European buyers, thereby helping manage European gas inventories. The report notes that this "price-driven fix" began to take shape in late July and has now become clearer. Qatari LNG loadings remain below Goldman Sachs' expectations due to reduced flows through the Strait of Hormuz, meaning Europe cannot rely solely on a rapid recovery in Persian Gulf supply to replenish inventories. The transmission mechanism has begun to work: the rise in TTF has pushed Asian spot LNG prices, represented by JKM, higher, weakening Asian buying interest and narrowing the JKM premium over TTF. Asia's price premium has now fallen low enough to give flexible US LNG renewed incentive to flow to Europe rather than Asia. US LNG loadings bound for Europe have increased relative to those bound for Asia, contributing to improved LNG imports into Northwest Europe. The core logic is that higher European prices narrow Asia's price advantage over Europe, thereby changing destination choices for flexible cargoes. However, the redirection of cargo flows remains insufficient to stabilize European storage injections. Since August began, the shortfall in actual storage injections relative to Goldman Sachs' expectations has continued to widen. If Northwest Europe's average injection rate over the past seven days remains unchanged for the rest of the month, Northwest European gas storage will reach only 51% by the end of August, 3.4 percentage points below Goldman Sachs' base-case scenario; at the end of July, the gap was 2.5 percentage points. Northwest Europe in the report includes the UK, Belgium, France, the Netherlands, and Germany. The widening inventory shortfall coincides with TTF recently rising above €65/MWh, a price that has pushed JKM into the mid-$20s/mmBtu. Goldman Sachs says this is close to the price range at which Asian industrial gas demand has historically begun to decline. Looking ahead, Goldman Sachs reiterates that if Persian Gulf LNG exports do not increase further—whether through visible or unreported Strait of Hormuz transit—TTF at €65/MWh will remain insufficient to help Europe safely manage inventories throughout the winter. Under a scenario in which Middle Eastern energy exports recover only gradually around 2027 and winter temperatures are average, Goldman Sachs estimates that Dec26 TTF may need to rise above €100/MWh, 110% above the €50/MWh base-case scenario, to curb Asian LNG demand more materially; the corresponding JKM price could approach $35/mmBtu. This outcome is consistent with the historically observed price sensitivity of LNG demand, but LNG prices have previously reached similar levels only during the 2022 European energy crisis, leaving a very limited sample. As a result, Goldman Sachs has low confidence in the precise magnitude of the demand response at such high prices and views it as a price-discovery process through which the market will need to find equilibrium gradually.

Analysis framework

The report first assesses whether Strait of Hormuz transit and Qatari LNG loadings are meeting expectations, then uses the relative spread between JKM and TTF to determine whether flexible US LNG is more economically attractive to ship to Asia or Europe, and subsequently evaluates whether changes in cargo flows can improve Northwest European imports and storage injections. Finally, under assumptions of a slow recovery in Middle Eastern exports and average winter temperatures, Goldman Sachs combines historical evidence on the price sensitivity of Asian demand to estimate the price level Europe may need to secure adequate winter inventories.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Rebalancing European and Asian LNG Supply and Demand

  The report treats restricted exports through the Strait of Hormuz as a supply shortfall and analyzes how far European prices must rise to curb Asian demand and attract more flexible cargoes to Europe.

• Industry/Sector Analysis FrameworkUpstream-Midstream-Downstream Transmission

  Transmission Chain Linking TTF Prices, JKM Prices, Asian Demand, Cargo Flows, and European Inventories

  The report's reasoning sequence is that rising TTF pushes JKM higher, weakens Asian buying, narrows the JKM-TTF premium, redirects US LNG to Europe, and ultimately affects European imports and storage injections.

• Industry/Sector Analysis Framework

  JKM-TTF Cross-Regional Price Spread and Cargo-Flow Incentives

  The report uses the relative difference between Asian and European gas prices to determine the economically preferred destination for flexible US LNG. The more the spread favors Asia, the more likely cargoes are to flow to Asia, and vice versa for Europe.

• Event Strategy and Behavioral FinanceEvent-driven analysis

  Scenario Analysis of the Recovery in Strait of Hormuz Transit

  The report treats the recovery of Persian Gulf energy exports as the key trigger and estimates the required price under a scenario in which exports recover only gradually through 2027 and winter temperatures are normal.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• European Natural Gas (TTF)

  Rising TTF attracts more flexible US LNG to Europe by weakening Asia's relative price advantage.

  Strengths

  Higher prices have already contributed to improved European LNG imports.

  Weaknesses

  €65/MWh remains insufficient to stabilize storage injections and manage winter inventories.

  Comparison

  TTF has become more attractive relative to JKM, causing the JKM-TTF premium to decline.

  Risks

  If Persian Gulf LNG exports remain constrained, Dec26 TTF may need to rise above €100/MWh.

• Asian Spot LNG (JKM)

  Rising TTF pushes JKM higher and has begun to reduce Asian LNG buying interest and industrial demand.

  Weaknesses

  After prices rise into the mid-$20s/mmBtu, Asian industrial demand begins to face contraction pressure.

  Comparison

  The JKM premium over TTF has declined and is no longer sufficient to keep attracting flexible US LNG preferentially to Asia.

  Risks

  If Europe needs to compete more aggressively for cargoes, JKM may approach $35/mmBtu, but the magnitude of the demand response at that price is highly uncertain.

Key data

• Northwest European Storage Level at End-August51%Assumes the average injection rate of the past seven days persists through the end of August
• End-August Storage Shortfall Versus Base-Case Scenario3.4 percentage pointsThe shortfall was 2.5 percentage points at the end of July and widened further during August
• Recent TTF Price ThresholdAbove €65/MWhThe report believes this level remains insufficient to manage European winter inventories if Persian Gulf exports do not improve
• Corresponding Current JKM LevelMid-$20s/mmBtuGoldman Sachs says this level has historically corresponded to the point at which Asian industrial gas demand begins to decline
• Dec26 TTF Under the Stress ScenarioAbove €100/MWhAssumes Middle Eastern energy exports recover only gradually through 2027 and winter temperatures are average
• Dec26 TTF Base-Case Scenario€50/MWhThe price required under the stress scenario is 110% above this base case
• JKM Under the Stress ScenarioClose to $35/mmBtuCorresponds to a scenario in which TTF rises above €100/MWh and curbs Asian LNG demand more materially

Impact & implications

The report argues that Europe is using higher prices to attract flexible global LNG cargoes again, but the storage injection shortfall is still widening. If Strait of Hormuz transit and Persian Gulf exports do not recover more quickly, the market may need to push TTF far above the current €65/MWh level to force a more material adjustment in Asian demand. Because similarly high prices have occurred only once, in 2022, the ultimate demand response and equilibrium price will need to be determined through price discovery.

Risks

• If Persian Gulf LNG exports fail to recover further, European winter TTF faces upside risk of rising above €100/MWh.
• Northwest Europe's August storage injection shortfall relative to the base-case scenario continues to widen, and the current increase in LNG imports remains insufficient to stabilize inventories.
• LNG prices have reached similarly extreme levels only in 2022, and Goldman Sachs has low confidence in the magnitude of demand contraction triggered by prices above €100/MWh.

What to watch

• Monitor whether Persian Gulf LNG exports and visible or unreported transit through the Strait of Hormuz increase further.
• Track whether Qatari LNG loadings can narrow the shortfall relative to Goldman Sachs' expectations.
• Monitor Northwest European storage injection rates and whether end-August inventories can exceed the current 51% projection.
• Watch the JKM-TTF spread, Asian buying interest, and the response of industrial gas demand to higher prices.
• Monitor whether winter temperatures align with the average-temperature assumption used in the stress scenario.