Weather and geopolitics shape European energy markets

During the past month, European energy markets have been driven for the most part by a combination of unusual weather patterns and significant geopolitical factors. The result has been a substantial increase in energy commodity prices and heightened volatility.

Central Europe experienced exceptionally wet weather and temperatures close to seasonal norms, while Great Britain and the Nordics faced unusually warm conditions, with the former breaking the May temperature record by a significant margin. Low wind periods throughout the past month supported spot power prices across Northern Europe, with German power prices recently peaking above 200 EUR/MWh at times. However, this was overshadowed by the record imbalance price in Germany, which surged to nearly 10,000 EUR/MWh in early June. This extreme price spike was driven by lower-than-forecast solar power production during the morning hours, restricted French export capacity to Germany, and a shortage of flexible power plant capacity.

Additionally, Germany experienced negative power prices during noon hours due to solar overproduction, highlighting the increasing frequency of such volatile price events as renewable power capacity continues to expand. This volatility is expected to persist until flexible battery storage solutions become more prevalent. Meanwhile, French exports showed some improvement during May but did not recover fully. French nuclear production remained robust, flexibly ramping down during periods of low demand. Despite the overall weak power demand in Central Europe, which at times fell below 2023 levels, Southern Europe experienced a slight year-on-year increase in demand.

In the gas market, below-average injections and concerns about the sufficiency of winter storage drove prices higher, further supported by Austrian oil and gas group OMV’s warning of a potential supply cut by Gazprom, although this has yet to materialise. Norwegian maintenance and tight LNG supply reduced available gas, with EU storage levels falling below 2020 records but remaining above the five-year average in early June. Confidence in reaching full storage before winter has waned, prompting a shift towards building a stronger buffer with LNG to replace Russian gas. Strong Asian demand, heatwaves in South Asia, and fragile LNG exports have strained the market, resulting in the lowest EU LNG sendout in more than four years.

Against this background, coal imports to Asia have risen significantly to meet increased cooling demand and replenish stockpiles. Additionally, a tighter gas market, coupled with short covering of speculative positions, has bolstered European carbon prices. However, the European Parliament elections in early June may shift the bullish sentiment in the carbon market, as rising economic concerns and military threats could lead to a preference for a more industry-focused strategy over the green energy transition policy of the current Parliament.

Meanwhile, Portugal recently indicated a possible revision of its ambitious 2030 climate targets to manage consumer costs, raising concerns that other European countries may follow suit. This news has sparked considerable discussion about whether the European Commission might adjust its targets downwards, thus acknowledging the high costs of achieving them by the end of the decade, or maintain the current targets, risking potential non-compliance by member states.