A summary
Over recent weeks, energy markets have been driven sharply higher by geopolitical tensions, particularly the ongoing conflict in the Middle East. This pushed prices to some of their highest levels since the 2022 energy crisis, with extreme volatility along the way. Although prices have eased back slightly as the situation has become clearer, the market remains highly reactive and uncertainty is still shaping short-term pricing.
A key feature of the current market is strong backwardation, with near-term contracts trading well above those further out on the curve. This reflects immediate supply concerns and a heightened risk premium in prompt markets. At the same time, investment funds have rapidly shifted their positioning in European gas, moving from short positions earlier in the year to near-record long positions. That change has added further momentum and volatility to price movements.
LNG has been central to this latest market move. Disruption in the Strait of Hormuz has significantly reduced shipping traffic through one of the world’s most important energy routes, creating fresh concern around global supply. With around a fifth of global LNG flows typically passing through the strait, the impact on summer balances could be material. While global LNG supply is still expected to grow overall, any prolonged disruption would tighten the market considerably and keep pressure on European prices.
Competition for cargoes is also intensifying. Asian demand remains firm, and with higher prices available in that market, LNG cargoes are increasingly being drawn away from Europe. This matters because Europe is now much more reliant on LNG imports to balance the market and refill storage, particularly with reduced Russian pipeline flows. As a result, global competition for flexible supply is becoming a much more important price driver.
Storage is now the critical issue for Europe as the market moves through summer. Levels in northwest Europe are currently below the five-year average, leaving less margin for disruption during the refill season. If LNG flows improve and disruption in the Strait of Hormuz eases, storage could still recover to more typical seasonal levels by November. But if disruption persists through summer, refill rates are likely to remain slower, leaving the market much tighter ahead of winter and increasing the risk of significantly lower stocks next year.
On the demand side, some balancing support remains in place. Gas demand reduction across northwest Europe is still running above the EU’s 15% target, helping offset some of the supply-side pressure. Higher prices could drive further demand destruction if needed, but that would come at a cost to industrial activity and economic confidence.
There are some more supportive supply signals. Norwegian gas exports are expected to increase slightly this summer due to a lighter maintenance schedule. However, that improvement is being offset by continued declines in domestic production from the UK Continental Shelf and the Netherlands. So while there are positives, the broader trend in European supply remains one of structural decline and greater import dependence.
Carbon markets have also shifted. Earlier strength pushed prices close to three-year highs, but weaker industrial activity and policy uncertainty have since pulled both EU and UK carbon prices lower. More recently, support has started to return following renewed commitments to strengthen the EU Emissions Trading Scheme, including possible reforms to the Market Stability Reserve and longer-term decarbonisation funding. These developments could provide firmer support to carbon pricing over time.
For businesses, the message is clear: while some of the sharpest price moves may settle, the underlying risks remain firmly in place. Geopolitics, LNG disruption, storage uncertainty, weaker domestic supply and shifting carbon markets are all feeding into a more fragile outlook. In this environment, reacting late can be costly. A clear, proactive energy strategy remains essential.
