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Sign up for Energy RecapPressure is growing on the Nordic electricity market
Both Nordic spot and futures prices increased noticeably in May. Market participants fear where the current cocktail of bullish fundamentals may lead.
Earlier this spring, the Nordic electricity market remained relatively calm as many of the surrounding energy markets, including oil, gas and German electricity futures, rose sharply as a result of the outbreak of war in the Middle East. The war, and the impact it has, not least on gas supplies to Europe, initially had a comparatively limited effect on Nordic futures, which are generally less exposed to the changed fundamentals brought about by the closure of the Strait of Hormuz.
In May, however, the trend was different. The Nordic electricity market suddenly began to rise noticeably, and it was in particular the contracts for the summer months that experienced a sharp jump in prices. The hydro balance deficit continued to grow throughout the month and at one point reached as much as 35 TWh, the worst level in eight years. The limited hydro resources, combined with low wind production throughout the month and high gas prices due to the ongoing war in the Middle East, as well as limited LNG supplies, meant that spot prices rose sharply. The futures market also had to react to this, and it seemed as if market participants were beginning to realise that the Nordics are in a fundamental situation that could seriously lead to high prices over the summer. The system future for the upcoming quarter, Q3-26, closed on 29 May at a price of 58.48 EUR/ MWh, 16% higher than a year earlier, while the increases were even more pronounced for the June, July and August futures, the first of which has now entered delivery. The annual contract for 2027 was not as severely affected but still increased by 5% and was priced at 48.78 EUR/MWh when the market closed on 29 May.
The war in the Middle East has now entered its third month, and April had something in common with March: the conflict, and not least the closure of the Strait of Hormuz, continued to be the overriding theme across the European energy markets. While March initially featured a huge price jump, and the markets reacted to outright acts of war, the dynamics were different for most of April. Earlier this month, the US and Israel agreed with Iran on a ceasefire, and since then the markets have instead been closely following the diplomatic moves. The Strait of Hormuz remains closed, and threats, political positioning and stranded negotiations have been at the forefront in April. Overall, the fluctuations have been somewhat smaller, especially in the gas market and the German electricity market, than in March, but statements from Donald Trump in particular can still move the market considerably.
