Risk premium fades while fundamentals stay tight

European energy markets spent another month caught between diplomatic hope and an unchanged and constrained physical reality. Hopes of a US-Iran deal to reopen the Strait of Hormuz dominated sentiment, yet effectively the Strait stayed closed and Gulf supply remained far below pre-war levels. The missing 100 LNG cargoes a month of Qatari production continue to make their mark, as do the global crude oil inventories that drew 129 million barrels (mb) in March and another 117 mb in April at what the IEA described as record pace. With the conflict now past its ninetieth day, every 24 hours without normal shipping makes the task of refilling European gas storage before winter much harder and keeps volatility risk high.

Gas led the way upwards during the past month, with the benchmark Dutch TTF day-ahead prices grinding back up to the high 40 EUR/MWh. Europe's storage refill made a slow start, leaving stocks around 41% in early June, well behind last year, as the missing Qatari cargoes continued to weaken LNG sendout. Underperforming Norwegian exports and an inverted forward curve discouraged injection while a widening Asia-Europe premium drew flexible cargoes east. Without a clear breakthrough, the competition for scarce LNG should keep European prices firm throughout the summer refill season, with the TTF upside a moving target.

Nearby European power markets were shaped less by the war than by weather and renewable output. A warm, dry and largely calm May lifted both spot and short-term forward prices, with weak wind and low Nordic and Alpine hydro offsetting strong solar. Spot prices were often near zero through the midday solar peak, while evening peaks stayed high, with heavier solar curtailment preventing a repeat of the deep negative prices seen at the start of the month. Mid- and longer-term forward power prices received additional support from firmer coal, as European burn rose sharply, and from a late rally in carbon, where a clear fundamental deficit pushed EUAs above recent levels. Oil stood out as the exception, falling sharply as the Hormuz risk premium eased but, with fundamentals still tight, the move reflected hope rather than resolution.

The summer ahead looms as the critical period. A strong El Niño looks increasingly likely and could push Southern European energy demand to multi-year highs, given the region's high sensitivity to heat as air-conditioning ownership climbs. That said, underlying power demand remains weak, with falling European industrial activity expected to be offset only slowly by a structural shift towards electrification and fast-growing data-centre load. Looking ahead, our focus remains on any genuine reopening of the Strait of Hormuz, the pace of LNG arrivals through the refill season, and the weather, all set against a still-fragile demand backdrop. In the near term, attention also turns to the European Central Bank's June interest rate decision amid rising inflation. The Iran war is proving to be a persistent driver of inflation, with higher energy costs filtering through to other product categories.

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