Price swings amid volatile weather, market speculation, and geopolitical risks

European energy markets experienced significant volatility during September, driven by a combination of weather disruption, geopolitical tensions, and ongoing supply constraints. Gas prices declined sharply mid-September, triggered by rumours of a Ukraine-Azerbaijan transit deal, but partly recovered once these rumours were dismissed. Meanwhile, supply tightness persisted due to extensive Norwegian maintenance and reduced LNG imports, as high temperatures in Northeast Asia kept energy demand elevated. Power markets were equally turbulent, especially in Central and Eastern Europe, where heatwaves in the first half of the month drove a surge in demand and price spikes. Later in the month, heavy rainfall boosted hydro generation and, along with cooler temperatures, helped relieve upward pressure on prices. Coal prices ended slightly below August levels, although concerns over low European stockpiles ahead of winter continue to grow. Meanwhile, carbon prices fell further, weighed down by bleak macroeconomic conditions.

The gas market faced significant pressure during the past month due to persistent supply constraints. Despite high European inventory levels, concerns grew about the ability to sustain this comfort through the winter, as LNG availability remained low and the ramp-up of Norwegian exports was delayed by extended maintenance. LNG cargoes were increasingly diverted to higher-paying Asian markets, where demand is expected to rise due to forecasts of a colder than usual winter. Additionally, escalating tensions in the Middle East prompted Egypt, traditionally an importer of Israeli natural gas and a key LNG exporter, to issue a tender for 20 LNG import cargoes. This move put Egypt in direct competition with Europe for the same limited supply of LNG, further tightening the already constrained global market.

Although European inventories are nearly full, the market remains fragile, with the risk of a rapid depletion of gas stocks looming as winter approaches, especially if the weather proves colder than in the past two very mild seasons. On the coal front, European stockpiles at ARA region terminals (Amsterdam-Rotterdam-Antwerp) have fallen to 3.4 million tonnes, down from more than 6 million tonnes a year ago. Although reduced coal use in power generation has lowered the need for large reserves, coal may still serve as a backup for gas this winter. This risk is amplified by the potential for additional constraints to the supply of gas, particularly as expiration of the Russia-Ukraine transit agreement approaches at the end of the year.

Looking ahead, energy markets are entering a phase of heightened uncertainty. Gas remains the primary concern, particularly as the ability of Europe to secure enough LNG cargoes is in question as global demand intensifies. Another key driver is the modest recovery in energy demand, while recent reports indicate further declines in European industrial demand. This raises an important question: will industrial energy demand in Europe continue to contract, or have we already experienced the bulk of these reductions with only minimal losses to come? 

In response to these challenges, we have seen an increasing number of stimulus measures from central banks and governments aimed at reviving economic activity and boosting energy demand. Although it is too early to fully assess their impact, these initiatives could trigger higher industrial energy consumption, providing some support for demand recovery as we move towards 2025. As European energy markets prepare for a potentially colder winter, the question remains as to whether this winter will be more challenging than recent years, when Europe already faced significant pressures on its security of supply.