Gearing up for the winter season

Despite rapid shifts in some energy markets and fundamentals over the past months, two factors have remained unchanged: persistent and looming supply risks and weak energy demand. Ukraine’s incursion into Russian territory, combined with escalating conflicts in the Middle East, has triggered geopolitical risks, heightened uncertainty around European gas and global coal supply, and sparked a rally in gas prices during the first half of August. Meanwhile, power prices were pulled in opposite directions. Western European power prices surged initially due to the rise in gas prices and worsening hydro balances while Eastern prices plunged, driven by the holiday season and cooler temperatures. In other parts of the energy complex, both coal and carbon prices fluctuated around their long-term trends, while oil prices dropped further despite delayed OPEC production hikes and unplanned supply outages. Against this background, ongoing structural demand destruction has partially offset the bullish supply risks, and also was mainly responsible for the bearish turn of price trends since mid-August.

On the gas front, a sharp slowdown in LNG supply to Europe over the past months intensified concerns about supply levels. This uncertainty deepened in early September when Egypt, a former LNG exporter, tendered 20 cargoes for delivery over the next two months, further tightening the global LNG market. However, strong Norwegian pipeline flows and subdued demand eased some of these concerns, allowing European gas inventories to reach 92.5% of capacity. Meanwhile, uncertainty surrounds the outlook for gas flows to Eastern Europe through Ukraine, following the expiration of the Ukraine-Russia transit agreement at the end of this year. Additionally, the ongoing conflict in Ukraine raises the likelihood that eastern markets will need to boost export flows to the Ukrainian power system, which has been severely damaged by Russian assaults in recent months.

On the power side, French nuclear production remains robust, with EDF raising its official production target for the year. This was driven by earlier than expected restarts, favourable weather conditions, and improved management of stress corrosion issues. Additionally, EDF confirmed that the long-awaited Flamanville-3 reactor will be connected to the grid by late autumn, with full capacity expected by year’s end. Meanwhile RTE, the French transmission system operator, announced an increase in the cap on eastern flows from 8 GW to 10 GW, prioritising constraints on the Italian and Swiss borders. The critical role of interconnectors is underscored by the case of Finland, where the EstLInk-2 interconnector between Finland and Estonia returned to full capacity in early September after a seven-month outage, enabling imports from the Baltic markets and helping offset capacity restrictions on interconnectors to Sweden. This also mitigated the temporary loss of baseload capacity from the Olkiluoto-2 nuclear reactor, which went offline for several weeks due to a turbine fault. 

For September and October, several gas supply risks remain. These include significant Norwegian and Algerian production cuts due to scheduled maintenance later this month, as well as anticipated strong storm activity in the Atlantic, which could disrupt LNG facilities in the US. However, declining LNG demand in Asia raises the likelihood of additional LNG cargoes being redirected to European markets. Meanwhile, European demand is still a major source of uncertainty and concern for policymakers, as it remains below pre-energy crisis levels. Notably, Mario Draghi’s report on the need to improve Europe’s competitiveness was published by the European Commission shortly after Volkswagen signalled the potential closure of two German car production plants, a development which has arguably further weighed on Germany’s power demand recovery outlook. We will continue to closely monitor these macroeconomic and policy developments, along with the US elections, to assess and report their impact on the European energy market outlook.