Record heat lifts spot prices as futures ease on US-Iran ceasefire attempt

Last month, we noted that energy markets were still stuck between diplomatic hope and physical reality, with summer heat intensified by a strong El Niño among the key risks that lay ahead. Both factors materialised in June. A heatwave in the second half of the month broke temperature records across Central Europe, bringing exceptionally dry weather that weakened hydro balances outside the Nordics. At the same time, the US and Iran agreed to extend their ceasefire, formalised in a memorandum of understanding. The result was a market pulled in two different directions. Spot power prices climbed to unusually high summer levels driven by the demand for cooling. At the same time, futures declined as the geopolitical risk premium was partly priced out. Renewed clashes in the Middle East changed this in early July again, though.

On the gas front, TTF prices eased to 45 EUR/MWh in June, albeit far from smoothly. Prices rose while talks were stalled, plunged 16% in a week on news of an imminent ceasefire, before Iranian attacks on commercial shipping and retaliatory US strikes on Iranian targets recently reversed part of that decline. LNG tankers resumed transiting the Strait of Hormuz, but Qatar was ramping up production more slowly than many expected while the first attack on an LNG tanker in early July suggests a choppy recovery. At the same time, demand outperformed as the heatwave lifted gas-fired generation while part of the nuclear fleet was offline, leaving EU storage under half full and still well behind last year.

Similarly, coal prices retraced as the geopolitical premium faded, even though European coal burn rose sharply on the year and Amsterdam, Rotterdam, Antwerp (ARA) days of use point to thin stock coverage. Brent oil also slipped as Persian Gulf exports increased and OPEC ramped up production. Emissions certificates stood out as the exception, with EUAs trading sideways. Attention now turns to the European Commission's ETS and MSR Review proposals due on 17 July, while the UK prime minister's resignation has delayed the planned EU summit and, with it, progress on linking the UK and EU ETS. All of this passed through to the power market: futures followed fuels lower while spot prices were high for a summer month as demand for cooling and weak wind drove gas-fired generation outside the solar hours, prompting system warnings from the British and Polish grid operators.

Looking ahead, July is expected to remain drier and warmer than normal in Continental Europe, pointing to further deterioration in Alpine hydrology, with warm rivers risking further cuts to nuclear output. As a result, spot prices are likely to remain high while the Nordic price should fall on better nuclear availability and a return to normal temperatures. What is more certain is that, at the current pace, Europe will struggle to enter the winter with storage above 73% full, the lowest level in at least fifteen years. Our focus therefore rests on the pace and safety of Hormuz shipping, the strength of Asian competition for LNG through the refill season, and July heat itself.  

Last but not least, we continue to monitor macroeconomic developments closely, mindful that the escalation of Middle East hostilities delivered an inflationary shock to the global economy and tempered forecasts for growth. The ECB responded with its first rate hike since 2023, raising the bank’s 2026 inflation projection while trimming forecasts for growth. Meanwhile, the US Federal Reserve, facing domestic inflation at its highest since 2023, held rates steady but signalled a more hawkish path. The latest data, however, point to easing pressure, with June's flash Eurozone inflation falling back to 2.8% on cooling energy costs and the composite PMI at a three-month high. This gives the ECB room to be patient and, contingent on de-escalation in the Gulf and the normalisation of energy flows, the risk of persistently elevated inflation should recede.

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