Cold weather, hot markets

If the opening month is any guide to what lies ahead, 2026 is shaping up to be another year of rapid shifts, heightened uncertainty, and elevated price volatility. What were the main drivers in January? Shifting weather conditions across the globe, increased investment fund activity and ongoing geopolitical tensions, alongside other key fundamental drivers.

Starting with weather-related factors, northern and western parts of Europe experienced prolonged cold spells, with the Nordics and Baltics in particular recording one of the coldest Januaries of the past decade. Combined with periods of low wind generation across much of the continent, this led to greater electricity demand and increased reliance on thermal power generation. Meanwhile, the hydro deficit in the Nordic and Alpine regions continued to widen which, along with unplanned outages and delayed returns of French nuclear reactors, further amplified price increases.

These developments were also reflected in fuel markets. Higher gas-fired power generation and heating demand accelerated storage withdrawals, pushing inventories down to around 40% of capacity, the lowest level for this time of year since 2022. In parts of Northwest Europe, storage levels fell even further, with inventories in countries such as the Netherlands dropping to just 25%, despite nearly two months of winter still ahead. The key difference compared with 2022, however, is that Europe now operates with significantly lower structural supply flexibility, following the loss of Russian pipeline flows through Ukraine and the shutdown of Groningen gas production. As a result, Europe has become far more exposed to LNG arrivals. Last month, however, weather-related disruptions to US LNG exports reduced available supply, triggering sharp gas price spikes to around 40 EUR/MWh. This was further amplified by short-covering from investment funds, and was enough to divert some LNG cargoes away from the Pacific basin and into Europe.

Over the same period, carbon prices experienced pronounced volatility. The EUA Dec26 contract briefly traded above 92 EUR/tCO2 in mid-month before the upward momentum was interrupted by investment fund’s liquidation of positions. At the time, funds had accumulated a record net long position of approximately 126 Mt. The partial unwinding that followed pushed prices down to around 81 EUR/tCO2, despite the market remaining structurally tight from a fundamental perspective. This structural tightness strengthened further as higher gas and power prices improved the profitability of coal and lignite-fired power plants, driving a 9% year-on-year increase in coal-fired output and weighing on ARA coal stock levels. Meanwhile, oil markets saw bullish price action amid escalating geopolitical tensions between the US and Iran, although these developments have lately appeared to shift towards diplomatic engagement.

Looking ahead, February is expected to remain cold and dry across parts of Northern and Eastern Europe, including the Baltics, Nordics and Poland. In contrast, parts of Southern Europe, most notably Spain, are likely to experience milder temperatures and increased precipitation, weighing on spot power prices. In the gas market, end-of-winter storage levels, largely shaped by weather conditions, will be a key determinant of whether policy interventions to incentivise storage refilling become necessary. In the meantime, additional LNG supply is expected to come online over the coming months, although the outlook for liquefaction growth remains most uncertain in relation to Qatar. Finally in the carbon market, the potential for an earlier-than-scheduled conclusion of RePowerEU front-loading sales, prospective changes to the EU ETS as part of the system review, and the forthcoming publication of the 2026–2030 free allocation benchmarks, among other factors, represent important developments worthwhile keeping an eye on, too.

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