Winter supply outlook improves despite mixed market signals

In sharp contrast to last summer, Europe’s energy supply concerns for next winter eased during July. Unseasonably high European gas inventories and significantly improved hydro balances were among the main underlying drivers. High precipitation along with cool and windy conditions lifted Nordic hydro stocks above the five-year average for the first time this year, while the hydro balance in the Alps improved remarkably. In addition, the energy supply outlook was underpinned by the French nuclear fleet’s exceptional performance, producing significantly higher than last year and completing maintenance earlier than the market expected. All the aforementioned developments, combined with persistent demand destruction and gloomy macroeconomic indicators, contributed to an improved winter supply outlook, as also manifested by the weakening price contango when looking at winter contracts.

Fuel markets contributed to the bearish sentiment, with gas inventories remaining at an unseasonably high level. On the gas side, Norwegian supply surged during the second half of July as the Nyhamna gas processing plant returned to full capacity. LNG supply remained robust despite the peak summer cooling period in Asia. In fact, a long heatwave in China increased electricity demand for cooling, which was largely met by coal-fired power generation. This triggered strong import demand from coastal power plants in China and doubled coal imports in the second quarter of the year, offsetting weak European coal consumption. Extensive shipping delays at the Panama Canal supported strong LNG deliveries to Europe and, along with the Turkstream pipeline, secured a robust gas supply to Europe. Add to this the persistently subdued demand for gas in the industrial and power sectors and it is easier to understand how EU storage levels reached 86% full on 1st August, well above last year and the previous August high in 2020.

Against coal and gas markets, crude oil markets witnessed a bullish shift, driven primarily by voluntary oil supply cuts instigated by OPEC/OPEC+. Several other additional factors, including the pause of U.S. government sales from its Strategic Petroleum Reserve (SPR) and the diminishing likelihood of a severe economic recession, supported crude oil prices significantly during July. On the carbon side, prices remained in the narrow 85-90 EUR/t corridor, driven by coal-to-gas fuel switching costs. Meanwhile, the upcoming seasonal reduction in auction volumes is expected to have a limited price impact, as this has been anticipated by market participants for some time.

All things considered, European energy security continued to improve throughout July, with high gas inventories, solid hydro balances, a flexible French nuclear fleet and persistent demand destruction providing a cushion, should any market developments challenge its resilience.

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