12.07.2023 | European Energy Markets Monthly, July 2023
European energy prices increased over the past month on the back of lower fuel imports, intensifying competition in the global LNG market and hence tighter overall balances than anticipated. The rise of Asian over European prices indicated that the battle for LNG supply between European and Asian buyers is not completely over, reviving memories of last summer, even though in relative terms the uplift was negligible. Price volatility also surged, reflecting market uncertainty over expected fuel imports to Europe from other sources, such as Norwegian gas, Colombian coal and crude oil from OPEC, and timely restocking of European fuel inventories. At the same time, power fundamentals dampened bullish market sentiment through the reduction of residual load, while carbon prices rebounded as a result of more costly fuel-switching.
In the gas market, prices surged after five months of successive drops in the wake of extended outages in Norway, rising LNG competition, and slower refilling of gas inventories. In particular, extension of the Norwegian Nyhamna gas processing plant’s maintenance outage by three weeks into mid-July propelled gas prices, confirming Europe’s continuing dependence on imported gas. European gas storage facilities, however, remain on track to fill up ahead of the coming winter, despite a slowdown in additions and further decline from the five-year surplus storage average. Coal prices rose in tandem with gas during recent weeks amid declining ARA (Amsterdam-Rotterdam-Antwerp oil trading hub) stock levels. This is a probable indicator of plunging imports, when considering the persistent subdued coal demand in Europe. In fact, coal prices over previous months have been lower than the break-even points for imports from Colombia, South Africa, and the United States. Having said that, the possibility of Europe re-barging coal, or imports normalising again over the coming weeks remains viable. Elevated fuel prices and increased coal-to-gas switching costs in particular saw EUA (European Carbon Emission Allowance Futures) carbon prices gaining around 8 EUR/t, reverting to their 85-95 EUR/t trading range, prevalent over the year to date.
European power prices also surged on the back of higher fuel and carbon prices, as the latter lifted the dispatch cost of thermal power plants. However, improved nuclear supply across Europe, along with persistent power demand destruction and ample renewable production, restrained bullish market sentiment. In fact, high solar generation levels over the past month once again pushed power prices into negative territory. July recorded extreme negative pricing, down to －500 EUR/MWh in several European markets, including the Netherlands, where gas-fired CHP (cogeneration or combined heat and power) units reduce system flexibility and exacerbate the inversion of peak and baseload power prices. So far, overall, Europe appears well positioned for the winter season, but any sign of upcoming tight balances will stress the markets and test their resilience.
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