Once again, weather and politics drive European energy markets

As in previous months, weather and politics have driven energy prices during the past weeks. And almost as often, those drivers offset each other, leaving prices trading within fairly narrow ranges.

Starting with the electricity side, after a hot June temperatures in Central and Western Europe returned to normal in July. Although this came with less-than-normal wind and solar supply, it did bring some recovery to hydrological balances. This allowed proper cooling of nuclear plants in France and Switzerland to resume, helping to push French nuclear power generation back to one of the highest levels for this time of the year since 2017. By contrast, thermal power production only saw minor increases as European electricity consumption remained weak, at around 2024 levels.

On the gas side, weak demand also continued. In addition to the above factors and despite its already strong position against hard coal, industrial gas consumption is failing to improve in the currently sluggish economic situation. Thanks to this and the gradual ramp-up of North American LNG export capacity, storage continued at a steady rate throughout July, with EU inventories reducing the deficit to the 5-year average, from 100 TWh to 84 TWh as of early August. Notably, this comes despite increasing import competition from Egypt and Ukraine as well as periods of hot weather in Japan.

However, current low gas storage levels continue to represent a bullish risk for the coming winter. To ensure comfortable inventories going into the season, Europe is relying on continuously available LNG from the US and cannot afford a demand spike at home. As such, the market remains very sensitive to adverse weather developments. Hot and dry conditions in Europe, for example, would threaten to curtail nuclear power production, while Atlantic storms could pose risks to US energy exports.

Talking about US relationships brings us to the second highlight of the past month: the tariff agreements and announcements made by the White House. Europe’s deals on US import tariffs – set at 15% for the EU and 10% for goods from the UK – have brought some initial relief. However, uncertainty remains high given that the deals include other elements – such as the EU buying 750bn USD worth of US energy over 3 years and committing to invest 600bn USD in the US by 2029 – and the need for all EU member countries to approve the deal. Another uncertainty factor is the US threat of secondary tariffs on buyers of Russian energy. This drove gas prices higher towards the end of July, exacerbated by temporarily higher oil prices, amid risks of tighter energy markets.

Going into August this risk still lingers, with President Trump giving buyers of Russian oil and other goods until early this month to halt these purchases or face high tariff penalties. Together with the weather risks mentioned earlier, we can therefore expect some further energy price volatility this month.

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