This article is a part of Energy Recap - our monthly deep dive into the energy market. Get articles and analyses from our market experts on the most interesting agendas, key events shaping the current prices, and forecasts for the month to come.
Panic spreads across the markets ahead of winter
Winter is upon us, and panic is evident across the European energy markets, which had clearly underestimated the seriousness of the situation earlier in the year.
It has now been eight months since the war in the Middle East broke out, and prices on the global and European energy markets have essentially been rising since then. October has been different, however, in the sense that the price increases have intensified dramatically.
Across the gas, coal and electricity markets, we have to go back to the energy crisis of 2022 to find higher levels than those we are seeing right now, and at no point this year has the pace of the price jumps been more dramatic than in October.
The most traded Nordic system futures have risen by 15-20% during the month, and the month has also brought huge increases in other relevant markets. On Europe’s most liquid gas exchange, TTF, the day-ahead price has increased from 73 EUR/MWh to no less than 100 EUR/MWh during October, while the 2027 future now costs 80 EUR/MWh compared with 56 EUR/MWh at the start of the month.
The extraordinary price increases in gas have been crucial in sending other markets sharply higher as well. In the continental electricity markets, where gas is of crucial importance for pricing, we have seen a direct spillover effect. The German 2027 future thus rose by no less than 26% during the month and stood at as much as 162 EUR/MWh as October turned into November. The enormous price increases reflect a form of panic in the markets, which have had to accept that the war in the Middle East has not developed as many may have believed in its initial phases.
Severe hydrological pressure on the Nordics ahead of winter
The Nordic countries are of course greatly affected by the extremely strained situation on the gas market, and the impact this has on Europe as a whole, but the other important element that has contributed to the large price increases in October is the strained hydrological situation.
At the end of October, the Nordic hydro balance shows a deficit of 13 TWh, and we can therefore conclude that the Nordics will enter the heating season with noticeably less water in the system than normal at this time of year. Behind the large deficit, a picture emerges of fairly large differences in how much water is available in the different parts of the region. The northern price areas, for example NO4 in Norway, actually have a surplus of water compared with normal, while we see a severe deficit in the south. In the southernmost Norwegian price area, NO2, there has not been as little water in the reservoirs in 30 years as there is right now, and this naturally puts further pressure on the already vulnerable southern price areas in the Nordics.
With as large a deficit as we are experiencing right now, the Nordics rely to a very great extent on the continent when it comes to prices, and from a consumer perspective this is naturally not desirable at a time when gas prices are developing as they are.
