Decoupled fuel prices and geopolitical tensions shape energy markets

Across the European fuel matrix gas prices continued to ease over the past month, due mainly to robust supply conditions. In contrast, carbon prices strengthened on increased activity from investment funds. Meanwhile, the renewed US-led initiative for Russia–Ukraine peace negotiations helped temper geopolitical risk premiums across energy markets. At the same time, European governments continued to roll out policy measures to support structurally challenged energy-intensive industries.

In the power sector, early November warmth gave way to a cold spell, triggering higher power demand across the continent. Nevertheless, year-to-date demand in key markets such as Germany remained broadly flat, reflecting persistent structural pressures on European industry. European power prices, though lower than in recent years, remain elevated relative to other major regions, weighing on the competitiveness of domestic producers. In response, Germany’s lower house of parliament approved a EUR 16.2 billion package within the 2026 budget to shield industry from higher electricity costs, the effectiveness of which will only become clear later in 2026. Meanwhile, the HCOB Eurozone manufacturing PMI slipped back into contraction in November amid weakening demand and job cuts saw the fastest pace in seven months, raising questions over whether the European economy has fully absorbed the impact of US tariffs. At the same time, Eurozone inflation rose 2.2% year-on-year, reinforcing expectations that the ECB will keep borrowing costs unchanged later this month.

In the gas sector, above-average storage withdrawals during the cold spell were partially offset by flexible LNG imports, while robust French nuclear performance reduced gas-fired power generation in parts of Europe and tempered overall gas consumption. In addition, diminished prospects for early-December cold weather, a growing consensus around a global LNG oversupply in 2026, and a potential Ukraine peace deal further pressured gas prices. As coal and lignite plants became less competitive, demand for emissions allowances fell. However, structural tightness in coming years and near-record positioning by investment funds pushed carbon prices to a 10-month high, limiting further declines in power prices.

Overall, Europe entered December with gas inventories at 75% capacity – around 10% lower than a year earlier – and remains heavily dependent on LNG imports which are sensitive to weather conditions not only in Europe but the US and Asia also. Meanwhile, the EU reached a landmark agreement to end all Russian gas imports by November 2027, a move intended to curtail Moscow’s access to vital financing for its war in Ukraine. In addition, the upcoming launch of the EU’s Carbon Border Adjustment Mechanism (CBAM), expected to take effect in January 2026, will serve as a primary instrument for preventing carbon leakage, with a broader review expected in early December to clarify several operational details.

We will continue to monitor these policy, market, and geopolitical developments closely, as they remain central to the outlook for European energy markets, also in 2026. We wish all readers, customers and partners a peaceful festive season as well as a very Happy New Year.

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