Mild weather and renewed nuclear confidence blunt winter risks

The bearish weather conditions through which Europe navigated September improved its energy outlook and mitigated winter supply risks.

On the demand side, record-high average temperatures pushed back the start of the heating season to October, contributing to persistently weak demand. On the supply side, meanwhile, strong precipitation in the Nordics bolstered hydro balances, surpassing long-term averages. Adding to the positive supply outlook, EDF managed to swiftly increase French nuclear production, significantly exceeding last year’s September levels. This development raised optimism among market participants regarding the French nuclear fleet’s performance during the coming winter, thus eroding the nuclear-related risk premium on French winter contracts.

On the fuel side, Australian LNG labour strikes initially generated an excessive European gas risk premium, anticipating potential losses to LNG supply. Although this risk failed to materialise, a significant reduction in Norwegian supply impeded stockbuild momentum, leading to higher gas prices through the month. Meanwhile, coal prices increased, driven by record-high imports to China which, during August, accounted for more than 40 per cent of the global market. This surge can be attributed to uncertainties surrounding domestic coal production, marked by increased inspections. Additionally, it corresponds with the growth of steel exports and robust demand from the power sector amid high temperatures and reduced hydro production. Another contributing factor was Russia’s announcement of an additional tax on coal exports, which poses a potential threat to the remaining price competitiveness of Russian coal. South Korea’s strategic shift to diversify away from Russian coal adds another factor to the evolving coal landscape, intensifying global competition for non-Russian coal resources.

In the carbon market, subdued industrial production, improved French nuclear production and elevated Nordic hydro balances dampened demand for emissions certificates, offsetting the more favourable position of coal compared to gas plants in the merit order curve. Meanwhile, the UK’s lacklustre industrial and power sector activities significantly curtailed emissions, exerting a persistent downward pressure on UKA futures prices. This is further exacerbated by the absence of a mechanism similar to the European Union’s Market Stability Reserve, which regulates the supply of emissions allowances. By contrast, oil prices surged to new peaks for the year, propelled by an extension of OPEC/OPEC+ export restrictions until December. Russia’s announcement of a ban on gasoline and diesel exports to most non-Former Soviet Union buyers also contributed to this bullish market sentiment.

Looking ahead, we anticipate that October will see sustained weak gas demand coupled with a significant increase in Norwegian supply. The persistent coal import activity into China may face challenges in sustaining momentum, particularly if its real estate sector continues to show weakness and winter weather conditions turn out to be milder than normal. Meanwhile, we maintain our view that the ratio of gas to coal prices will continue to be the primary underlying factor for EUAs in the coming months. At the same time, we are closely monitoring policy developments regarding the potential splitting of Germany’s electricity market bidding zone.

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