Heat, LNG disruption and low water levels lift European energy prices

European energy markets moved higher in July as renewed conflict around the Strait of Hormuz disrupted shipping and persistent heat and drought tightened power market fundamentals.

The breakdown of the US–Iran memorandum of understanding halted a brief resumption of LNG flows from the Gulf and revived risk premiums across oil, gas and electricity. TTF, Europe’s primary natural gas trading hub, rose by more than 30% in ten trading sessions, peaking at 65 EUR/MWh during the US 13-night bombing campaign on Iran. European LNG sendout fell to multi-year lows – 35% below June – while heatwaves, weak hydro and related nuclear curtailments and coal transport constraints lifted gas-fired power demand across France, Italy and Iberia. EU gas storage stood at only 57% full and deteriorating seasonal spreads continued to discourage commercial injections. Coal prices also rose, with API#2 Q4 26 futures increasing 13 USD/t month-on-month as concerns over gas supply increased the call on coal generation. However, exceptionally low Rhine water levels are now raising the cost of supplying coal to power plants upstream. Meanwhile, EU emission allowances (EUAs) increased by just over 1 EUR/t during July following the European Commission’s review of the Emissions Trading System and Market Stability Reserve. Its proposals to soften the long-term tightness were broadly anticipated and had little immediate effect on short-term balances. Markets expect EUAs to remain rangebound until the European Council and Parliament begin debating them after the summer.

Outlook for the gas storage refill season remains challenging. The current base case is for LNG arrivals in Europe to improve from mid-September, supported by muted Asian demand and a reduced forward incentive for flexible US volumes to move east. Even so, storage much above 70% by November appears difficult to achieve. The pace and safety of Hormuz shipping returning, the Asia–Europe LNG price differential and Egypt’s ability to replace disrupted LNG imports are key factors to watch.

Besides the higher costs for electricity generation from thermal units, power markets also reflected exceptional summer conditions. July was unusually hot in Western Europe, Iberia and Italy and dry across the continent. Alpine hydrology remained very weak, Iberia’s hydro surplus declined considerably and low river levels affected inland nuclear cooling and coal transport. Cooling demand rose, while low winds in Iberia, the British Isles, the Netherlands and France added further pressure. As such, spot electricity prices in most markets rose or at least remained on elevated levels close to or above 100 EUR/MWh. Only the Nordic system price fell to EUR 51/MWh as weather was more normal and nuclear output improved.

The short-term outlook remains firm. Hot and dry conditions are expected to persist in continental Europe into mid-August at least, keeping spot prices high. Hungary and Romania have already faced severe nuclear cooling constraints. Price volatility between low midday solar prices and high evening peaks is set to continue, with seasonally declining solar generation likely to extend the evening peak.
 

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