European energy prices head into winter at post-2022 highs

The winter pressure we flagged in October has arrived early. Nordic and Alpine hydrology remain significantly below normal, while low river flows continue to limit nuclear output in France and Romania as well as coal burn in Germany. Iran sought to regain control of the Strait of Hormuz through tanker attacks and mines, Gulf oil exports fell to about 70% of pre-war levels, and Washington prepared for a possible military campaign after the US midterm elections even as a Qatari draft deal emerged.

On the gas front, European benchmark TTF spot prices averaged 87 euros per megawatt-hour (EUR/MWh) in October, up 12 EUR/MWh on the month, and breached 100 EUR/MWh at month end for the first time since December 2022. EU storage entered winter at 75%, its lowest starting level in more than a decade. A cold end to October prompted downward revisions to end-of-winter storage forecasts, while strong Asian competition reduced LNG arrivals in Europe. Our BaseCase puts end-of-winter storage in the high teens to low twenties, expressed as a percentage of capacity. A repeat of colder weather patterns from the past decade would leave stocks far tighter, with 2022 prices remaining our main upside reference. In a more benign scenario, however, TTF has considerable risk premium to shed.

Higher gas prices keep coal competitive well beyond this winter, with European coal burn up 17% year on year in October. Brent ended the month some 20 US dollars per barrel (USD/bbl) higher before easing in early November on hopes of a deal. European Emissions Allowances (EUAs) also broke above 90 euros per tonne of CO2 equivalent (EUR/tCO2), supported by coal burn and an estimated 2026 allowance deficit of around 200 million tonnes (Mt). These pressures fed through to electricity, where spot prices reached their highest levels since 2022 in almost all markets, led by Hungary and Italy. Front-year futures recorded their largest percentage increases in Spain and France, with lower gas plant availability and a weaker hydro outlook adding support in Spain.

Looking ahead, November has begun drier, colder and calmer than normal in Central Europe, triggering gas storage withdrawals, although milder and windier weather next week should bring some relief. Our focus remains on the Qatari draft deal and the US response, LNG arrivals, hydro and nuclear availability, and Ukrainian import needs, as recent Russian strikes may have destroyed additional power generation capacity. High prices also raise the likelihood of market interventions, such as Italy’s proposed gas-price cap for electricity generation, and could strengthen calls to weaken the EU emissions trading system (ETS) as its review continues.

On the macro front, economists and purchasing manager surveys (PMI) continue to suggest a slight acceleration of GDP growth in Europe in 2027, which could support energy consumption. However, with inflation accelerating to twice the European Central Bank target in October and geopolitical uncertainties continuing, risks for this forecast remain biased towards the bearish side. Democrats have won control of both chambers of Congress in the US midterms, buoyed by concerns over affordability and opposition to the Iran war, although the White House retains substantial control over foreign policy. Meanwhile, China confirmed talks on a possible first trilateral meeting of presidents Xi, Trump and Putin at the APEC summit in Shenzhen on 18 and 19 November. With Moscow seeking a Ukraine settlement and Washington prioritising nuclear arms control, the talks offer a potential diplomatic opening, although differing priorities leave the implications for energy markets uncertain.

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