Hot weather and bullish risks test European markets

Weather conditions in July continued to be a major driver of European and global energy markets. Southeast Europe experienced unusually high temperatures, triggering increased cooling demand which, combined with low precipitation, propelled power prices above 500 EUR/MWh in some regions. Similarly, high temperatures in northeast Asia boosted energy demand and, in turn, coal prices due to China's pivotal role in global coal markets. On the supply side, a hurricane in the United States disrupted LNG markets, underscoring the vulnerability of a region that exports as much gas as Norway, Europe’s top pipeline supplier. Despite these challenges, European energy markets navigated July comfortably, avoiding the extreme high prices seen during previous heatwaves. Additionally, Europe continued to fill gas inventories at an accelerated pace, deflating the risk premium for this winter. Bullish risks remain, however.

On the power side, strong French nuclear production, along with robust hydropower output in Switzerland and the Nordics, provided upward system flexibility and prevented further price increases. French nuclear generation reached the upper end of the 2016-2023 range in recent weeks, with only minor production curtailment due to river temperature issues. Notably, only one French nuclear reactor has been affected by high river temperatures this July, a significant improvement compared to previous summers where multiple reactors in southern France were impacted. However, early August EDF issued a warning of potential heat-related output reductions at four nuclear power plants in southeastern France, highlighting their high sensitivity to further increases in river temperatures. Meanwhile, hydro stocks in Switzerland rose by more than 10 percentage points above the 5-year average in July, boosting hydro utilisation rates. This increase is probably driven by stronger exports to Italy amid French transmission system operator RTE’s announcement of reduced exports eastward, a decision that has resulted in the widening of France-Italy forward price spreads for August and September. Looking ahead, temperatures in southeast Europe are expected to remain above normal, supporting power price peaks, while strong precipitation in the Nordics will limit any possible price hikes.

On the fuel side, gas prices dropped due to high inventory levels, increased supply from Norway and the UK, and the prospect of gas transit via Ukraine continuing in 2025, with Azerbaijan replacing Russian flows. However, European LNG sendout remained stable and continues to be a significant bullish risk, given the continent’s high dependence on LNG imports, competition with Asia for winter restocking, and the North Atlantic hurricane season. EU Emissions Trading System allowance prices traded sideways against a background of persistently weak industrial demand and ample low-carbon power generation. Slightly lower than expected sales volumes from the EU’s innovation and modernisation funds in 2025, among other developments, support our bullish long-term outlook.

Last, but not least, significant losses in global financial markets have dampened optimism about an economic recovery, particularly with the US Federal Reserve expected to reject calls for significant interest rate cuts in September. Additionally, the potential escalation of the Iran-Israel conflict into a broader Middle Eastern crisis has emerged as a significant geopolitical risk, potentially driving gas prices up due to curtailed production in Israel and higher demand for LNG imports from Egypt. We will continue to monitor these macroeconomic and geopolitical developments, along with other fundamental market changes, to assess and report their impact on the European energy markets.

Disclaimer

This document is for information purposes only. None of the statements and notes constitutes a solicitation, an offer or a recommendation for conducting any transactions. No warranty, either expressed or implied, is given for the information contained in this document. Actions based on this document made therein are the responsibility of those who undertake them. All liability for damages, which may result directly or indirectly from the use of this document, is disclaimed.

The accuracy, completeness or relevance of the information which has been drawn from external sources is not guaranteed although it is drawn from sources reasonably believed to be reliable. Estimates regarding future developments and other forward looking statements regarding commodities and therewith connected derivatives mentioned in this document may be based on assumptions that may not be realized. Axpo reserves the right to change the views reflected in the document without notice and to issue other reports that are inconsistent and reach different conclusions from the information presented in this document.