Summer heat and conflict stoke winter risks

As forecast in last month’s edition of the EEMM, Hormuz shipping, LNG competition and the summer heat remained the key factors affecting energy markets during August. Record temperatures and drought persisted across most of Europe, cutting nuclear output in France and, due to low Danube water levels, in Hungary and Romania as well. Meanwhile, the US-Iran memorandum of understanding expired with neither side signalling any desire for renewal. Indeed, in late August the two sides once again exchanged attacks, each expecting the other to give in to time pressures. Energy futures rose on gas storage worries and a bleak hydropower outlook, while spot power prices in many markets reached their highest monthly averages since the energy crisis.

On the gas front, TTF spot prices rose to 61.50 EUR/MWh on average of August, recently peaking above 70 EUR/MWh when US forces struck Iranian assets reportedly preparing to lay mines in the Strait. With LNG carrier crossings still a rarity and Qatar effectively offline, Europe remains on a dangerous storage trajectory. Stocks entered September 65% full, the lowest in fifteen years, and look set to enter the winter at record lows of around 70 to 73%. This leaves  Europe very exposed to possible future shocks, either from the supply side, such as further LNG disruption, or the demand side, such as a cold snap. Higher prices are starting to curb some Asian buying, albeit with Asian prices still above Europe’s, with the focus now shifting to the end-of-winter storage level, which is largely dependent on the duration of the Middle East conflict and weather conditions.

Similarly, coal prices moved higher on winter hedging demand in Europe, despite currently low Rhine water levels lifting barging costs and constraining inland deliveries, reducing the effective economics for coal plants. Brent oil finished August near end-July levels, with Hormuz flows disrupted and diplomacy at a standstill, while EUAs traded sideways in a tight range. All of these developments passed through to the power market, where the roughly 10 EUR/MWh rise in front-year gas lifted futures across Europe. Spot prices rose by at least a fifth in Germany and France and to 180 EUR/MWh in Italy, leaving only the Nordics and Baltics below 100 EUR/MWh.

Looking ahead, September started warm and dry outside the Nordics and while cooler temperatures should ease the heat-related production cuts, seasonally falling solar output points to spot prices slightly above August. With gas storage, hydro reservoirs, rivers and nuclear availability all stretched, the system has little buffer against another disruption, while a credible, albeit hard to foresee, agreement between the US and Iran on navigation through the Strait of Hormuz could still force a sharp correction.

Our focus therefore rests on the Iran-Oman corridor talks and Washington's response, storage refill through October, and hydro, river and nuclear conditions. Last but not least, we continue to monitor macroeconomic developments closely. With the growth consensus for Europe recovering slightly over the past month and inflation expectations close to 3%, all eyes will be on the European Central Bank’s interest rates decision due on 10 September.

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