Winter pressure builds across European energy markets

Last month, we noted that gas storage, hydro reservoirs, rivers and nuclear availability were all stretched, leaving the system with little buffer against another disruption. September offered no relief: the month was again warmer and drier than normal across most of Europe and low river flows continued to limit French and Romanian nuclear output. In the Middle East, the conflict escalated on the military side, even as physical flows through the Strait of Hormuz improved. After two supertankers were hit in the Strait, the US struck Iranian tankers in retaliation for the first time, while a drone strike on Saudi Arabia's East-West pipeline forced Aramco into force majeure.

On the gas front, TTF spot prices rose by around 13 EUR/MWh to 75 EUR/MWh, the highest level since early 2023, as competition between Asia and Europe for LNG intensified ahead of winter. Prices eased in the second half of the month as Asian buying faded amid high prices while Qatari volumes began to return, with 12 LNG cargoes leaving the Strait of Hormuz in September after none in August. Despite this, European gas inventories are likely to peak at only around 74 to 76% in the coming weeks, with Germany instructing state-owned energy company SEFE to fill an additional 8 TWh, as market forces are unlikely to lift German storage much above 60% into winter.

Similarly, coal prices rose further in line with gas, as coal plants remained competitive, lifting European coal burn by 37% year-on-year and drawing Amsterdam-Rotterdam-Antwerp (ARA) stocks down to 3.9 million metric tonnes. At the same time, disruptions in South Africa, Indonesia and Kazakhstan tightened seaborne supply. Brent gained around 10 USD/bbl, as the escalation outweighed a recovery in Gulf oil exports to roughly 90% of their level before the war, while EU Allowances (EUAs) continued to trade sideways around 85 EUR/tCO2. Most of these developments passed through to the power market, where spot prices rose again, reaching around 208 EUR/MWh in Italy and climbing even in the Nordics, to around 96 EUR/MWh. Futures followed gas, with the largest relative increases in the Nordics, Spain and France, where strong spot prices drove the curves into backwardation.

On the macro side, the Eurozone composite Purchasing Managers Index (PMI) rose to its highest level in more than three years in September. However, temperature adjusted power demand remains around 6% below its 2017 to 2021 average and flat on the year, as better business surveys have yet to translate into a meaningful recovery in energy intensive industry. Meanwhile, inflation climbed to 3.8% on energy costs, keeping a further ECB hike in play after September's increase to 2.50%, while the Federal Reserve’s September minutes point to another US hike, likely in December.

Looking ahead, a wetter spell this week will bring rain to key hydro areas, though not long enough to close the deficits, while falling solar output points to higher October spot prices. Our focus centres on developments outside Europe, such as Hormuz flows and LNG arrivals, as well as within Europe, including hydro balances, ongoing nuclear outages, the first cold spells, discussions around the continent’s future climate ambitions and economic performance.

Disclaimer

This document is for information purposes only. None of the statements and notes constitutes a solicitation, an offer or a recommendation for conducting any transactions. No warranty, either expressed or implied, is given for the information contained in this document. Actions based on this document made therein are the responsibility of those who undertake them. All liability for damages, which may result directly or indirectly from the use of this document, is disclaimed.

The accuracy, completeness or relevance of the information which has been drawn from external sources is not guaranteed although it is drawn from sources reasonably believed to be reliable. Estimates regarding future developments and other forward looking statements regarding commodities and therewith connected derivatives mentioned in this document may be based on assumptions that may not be realized. Axpo reserves the right to change the views reflected in the document without notice and to issue other reports that are inconsistent and reach different conclusions from the information presented in this document.