Geopolitics overshadow European fundamental drivers

During March, European energy markets remained relatively stable, adopting a cautious ‘wait and see’ stance amid a volatile geopolitical landscape and unpredictable US import tariff policies. Despite these overarching uncertainties, fundamental market drivers largely followed expected seasonal trends. The arrival of milder weather contributed to a noticeable reduction in energy demand, while increased solar power generation prompted several instances of negative pricing across the continent.

In response to the surge in renewable energy output, producers of despatchable power, including hydro and nuclear plants, significantly adjusted their output to mitigate the risk of negative power prices. French nuclear plants, in particular, demonstrated significant modulation capabilities, especially during periods of strong solar production and low demand, achieving an intraday flexibility of 12 GWs. Furthermore, French nuclear output saw a 7% increase year-on-year in the first quarter, reaching a six-year high due to improved availability. This strengthened the security of supply and limited the despatch of thermal and, in particular, gas-fired power plants, thus slowing the depletion of European gas inventories. Despite this development, by the end of the winter gas storage declined to its lowest level in four years, standing at just 34% of full capacity.

On the gas supply side, LNG deliveries to Europe increased, surpassing levels seen in previous years. This significant surge is driven primarily by a substantial increase in spot cargoes from the US Gulf Coast, the rapid ramp-up of the US Plaquemines plant, and reduced LNG demand from China. Despite this influx, Europe continues to face significant challenges refilling its gas inventories in preparation for the coming winter. The situation is exacerbated by the need for substantial exports to Ukraine, where gas storage levels remain critically low. 

In response to these challenges, the EU recently proposed more flexible gas storage targets. The proposals, scheduled for a vote later in April, aim to alleviate some of the bullish pressure on summer gas prices and transfer it to the following winter, thus narrowing the previously inverted front winter-summer price spread and improving price signals for gas storage injections. Meanwhile, the front-month gas price dropped by around 40% in less than a month, primarily driven by a significant liquidation of net long speculative positions, which improved the competitiveness of gas versus coal-fired power plants. This development, together with fears of political interference in the carbon market and growing concern over global economic growth, led to EUA prices trading fairly sideways over the past month, despite the ongoing tightness of this market.

On the geopolitical front, ceasefire discussions involving representatives from Ukraine, the US and Russia fell short of expectations. Recent developments suggest that a ceasefire may not be feasible soon, reducing the likelihood of resuming gas flows through Ukraine for the remainder of the year. Additionally, concerns about global economic growth intensified amid the ongoing trade war and retaliatory measures. Last week, US President Trump escalated the situation by announcing the highest US tariffs in more than a century. That is, a levy of 10% on nearly all US imports from 5 April, with reciprocal tariffs as high as 50% on dozens of countries, beginning 9 April. These developments had immediate and severe repercussions: Wall Street stocks experienced their most significant drop in nearly five years, with $3.1 trillion wiped out during the session on 3 April. Meanwhile, the US dollar tumbled by 2.1% as concerns intensified over higher inflation and slower economic growth. 

We will continue to closely monitor the ongoing geopolitical and trade war developments, with a particular focus on the global response to the new US tariffs, assessing and reporting their impact on the European energy market outlook.

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