Markets shift towards bearish conditions

European energy markets left the summer season with a bearish fundamental sentiment continuing to ease security of supply concerns.

Gas inventories rose strongly, reaching the highest recorded levels for this time of year, while coal stocks remained close to the five-year average. Hydro storage was another important bearish driver, with heavy precipitation at the end of August improving hydro balances across Europe. In the Nordic region, extreme rainfall delivered record negative spot prices and led to a steep recovery of Norwegian hydro stocks. Some even exceeded their maximum capacity, improving the possibility of higher exports to mainland Europe in the coming winter. Meanwhile, several French nuclear reactors long offline due to corrosion issues were brought back to market. This lifted the year-on-year nuclear production surplus significantly, eroding the enormous risk premium on French winter power contracts which plunged by more than 100 EUR/MWh during the previous two months.

Despite the above bearish developments, however, supply risks emerged in August and once again tested the resilience of European energy markets. The prospect of possible strike action at Australian LNG export facilities triggered supply uncertainty in the global gas market, given that a full blown strike could cut around 7% of global LNG supply, and significantly increased European gas contracts during the first half of August. Europe rarely imports Australian LNG but Asian buyers would need to buy replacement volumes, prompting increased competition between Asia and Europe. Although the possibility of industrial action still looms (at the time of writing), its impact on European gas balances would be limited given ample gas inventories. In addition, annual maintenance and outages affecting Norwegian pipeline flows limited European gas supply and supported supply risks, which so far have been absorbed comfortably by European gas storage.

On the coal side, strong imports from China and reduced export volumes from Colombia tightened global supply. However, their bullish effect was alleviated by higher exports from Indonesia and Australia. In addition, competitive gas prices, improving nuclear supply, and persistent demand destruction limited coal consumption, leaving little room for significant coal price increases. All the above bearish developments, meanwhile, kept EUA prices oscillating within the 85-90 EUR/t price corridor for most of the time, although the seasonal reduction of auction volumes in August was also a supportive but short-lived factor. Moving into September, markets wait to see whether near-maximum European gas inventories provide incentives for further market adjustments, such as increased uptake of Ukrainian storage, or gas prices collapse in light of declining injection capacity. Meanwhile, an upside price risk is looming on the back of possibly prolonged LNG strike action in Australia and the seasonal hurricane threat in the US Gulf.

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