Europe on Edge

Gas, Power, and Carbon Dynamics Shape Winter Outlook

On Monday, European carbon prices saw a downtrend, hitting an eight-day low as signals pointed towards a waning demand. This decline seemed to be influenced by the growing sentiment that despite the onset of the winter demand season, fossil fuel consumption might not see a substantial uptick. Concurrently, energy prices also experienced a pullback, buoyed by an improving supply scenario in the North Sea gas sector.

Delving deeper into the numbers, the European Union's carbon market indicated a subdued performance with permit prices dipping to €86 per tonne. One significant concern fueling this downtrend is the observable sluggishness in the Eurozone's manufacturing domain. Initial estimates highlight that the Eurozone Manufacturing PMI slid down to 43.4 in September, underperforming market anticipations which stood at 44. This downturn in manufacturing vigor is especially pronounced in Germany, witnessing its sharpest drop since the initial phases of the COVID-19 crisis.

France, too, isn't far behind, with an accelerated contraction rate. Broadly, the Eurozone is grappling with its sixth successive month marked by a diminishing manufacturing output. This industrial slackening comes at a time when the European natural gas market navigates through turbulent waters, attributable to sporadic supply hitches as winter approaches. For context, earlier in the year, the carbon permit prices had soared past €105 per tonne, mirroring the escalating overheads that various industries, ranging from factories and powerhouses, have to shoulder due to their emission footprints.

As we step into the fourth quarter of 2023, the words "gas winter" send shivers down the spines of European stakeholders. However, despite boasting impressive storage levels, there's an unmistakable tension in the market, accentuated by persistent reminders urging responsible gas consumption.

Gas Dynamics and the Pressure on Supply

Gas demand, still reeling from pre-crisis tremors, remains substantially subdued. The slightest supply disruption, or even the touch of a colder winter, could ignite a gas shortfall alarm. This fragility became evident this summer. The mere threat of a strike in the Australian LNG sector combined with extended maintenance of Norwegian assets evoked deep supply apprehensions. Such anxieties were mirrored in the price spreads throughout the summer. S&P Global Commodity Insights' Platts showcased the Dutch TTF Winter '23 contract at a notable premium, which, although it has started narrowing, signals persistent unease.