Mixed peace signals and renewables shape energy market volatility

During the past month, European energy markets remained highly sensitive to conflicting signals around a potential de-escalation of the Middle East crisis and reopening of the Strait of Hormuz. The implications extend well beyond energy markets to global commodity trade and the wider economy. At the time of writing, the Strait remains effectively closed to normal commercial traffic and, despite some diplomatic upside from ongoing talks, the physical supply disruption remains firmly in place, supporting elevated energy prices and continued volatility.

Gas prices came under pressure in the first half of April as hopes of a ceasefire and Iran’s brief announcement that the Strait of Hormuz was open eased LNG supply fears. Prices quickly rebounded, however, once the announcement was retracted and diplomacy stalled. On the demand side, weak Asian buying also dampened sentiment. Chinese, Korean and Pakistani imports fell as buyers largely refrained from procuring alternative supplies, possibly opting instead to use substitutes or draw down inventories during a seasonally weak demand period. However, the North Asian cooling season is set to lift demand, with the widening Asian price premium incentivising flexible US cargoes to favour Asia over Europe. Meanwhile, strong non-Qatari exports are supporting European LNG sendout, although upcoming maintenance at French and Belgian LNG import terminals, along with the ban on spot Russian LNG from 25 April, will constrain supply and make storage refilling more difficult, with European gas inventories currently at 34% of capacity.

Oil markets remained under severe stress as regional exports tightened sharply, driving record inventory draws and early signs of demand destruction, particularly in jet fuel and petrochemical feedstocks. Meanwhile, the UAE’s decision to leave OPEC added a structural dimension to the crisis, weakening the group’s market-management capacity given the UAE’s role as an influential producer and one of the few members with meaningful spare capacity.

While gas and oil markets continued to be dominated by physical supply disruption, European power markets were shaped mainly by weather conditions and renewable output. April was mild, dry and sunny across much of Europe, supporting strong solar generation, although weak wind output and hydrological deficits in the Nordics and the Alps partly offset the bearish impact. Spot power prices declined in most markets, reflecting seasonally lower demand and strong solar output, while increasingly negative midday prices strengthened the economic signal for demand-side flexibility and storage. On the policy side, the European Commission announced its AccelerateEU energy resilience plan in response to the current crisis, aiming to accelerate the phase-out of fossil fuels by speeding up electrification and further shifting the system towards domestically produced clean energy.

Over the coming months, market attention is likely to remain focused on developments in the Middle East war and any reopening of the Strait of Hormuz, LNG flows into Europe during the storage refill season, weather-related risks such as heatwaves and hurricanes and, last but not least, the performance of the European economy, with the near-term demand outlook still exposed to a combination of macro weakness, energy affordability concerns, and weak industrial confidence.

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