Infographic: Russian gas transit halt spurs Europe's Q1 storage, price concerns

The European gas market has entered 2025 in very different shape to how it exited 2024, with the end of Russian gas supplies via Ukraine bringing new upheaval to the sector.

The EU countries most affected -- Slovakia and Austria -- have put in place alternative supply measures, but gas customers in Moldova's breakaway region of Transnistria have been hit hard by the end of Russian deliveries.

The confirmation of an end to Russian gas transit via Ukraine -- at least for now -- and concerns over fast-depleting gas stocks lent weight to European gas prices, which hit 14-month highs in early January.

Prices have dropped back in recent days, however, with Platts, part of S&P Global Energy, assessing the TTF month-ahead price at Eur45.45/MWh on Jan. 10, down from an assessed peak of Eur49.95/MWh on Jan. 2.

But concerns remain over storage levels for the rest of winter and a lack of economic incentive to refill stocks in the coming summer.

This prompted the European Commission in November last year to raise its EU-wide filling target for Feb. 1 from 45% in 2024 to 50% this year.

"Storage draw will be the critical parameter to watch in Q1," Alun Davies, Energy research and analysis director, said.

"Any drop in current LNG import rates, or colder than normal weather, would draw down levels close to the 50% EU Feb. 1 target," Davies said.

France and the Netherlands, in particular, are at risk of being under their respective national targets, with Dutch grid operator GTS warning of a potential tightening of supply in a "severe" winter given the level of stocks.

"Despite the cold, storages could be OK going through the winter, and weather could be gentler than expected in February," an Italy-based trader said.

A Switzerland-based trader said there could be a repeat of last year with mild weather late in the heating season and prices "slowly grinding lower until summer starts."

"Then we need to see if Asia will come back to pick up LNG cargoes," the trader said.

Davies said that even in the event of a warm end to winter, prices may not fall much given Europe's need to outcompete Asia for marginal LNG.

European LNG imports rose in December, with send-out expected to be 12.5% higher year over year in Q1 at 439 million cu m/d for the EU and UK, according to Energy forecasts.

It comes as gas demand is also set to rise, with Energy forecasting demand of 1.305 Bcm/d in Q1 -- up from 1.26 Bcm/d in Q1 2024 -- for Northwest Europe, Iberia, Italy, and Central and Eastern Europe.

Europe also needs to meet demand with the reduced Russian pipeline flows, although Davies said Ukrainian transit flows of Russian gas had largely been absorbed, with imports via Germany having risen.

And despite relatively high prices, it also appears likely that the EU's gas price cap -- which entered into effect in February 2023 -- will be allowed to expire at the end of January.

Power risk premia ease

Forward power risks were seen backing off in early January after German Q1 2025 contracts went into delivery at Eur110/MWh, 15% higher year over year.

Spikes in the UK day-ahead market in Week 2, meanwhile, echoed the "dunkelflaute" winter doldrums that pushed German spot power to multi-year highs in December.

"Conditions have been exacerbated by the ongoing high level of interconnector outages, which have meant Britain has been unable to take full advantage of the still-healthy French nuclear profile," said Glenn Rickson, head of near-term power analytics at Energy.

"Deviations in wind present the most profound risk to forecast in the near-term, exhibited by the price swings observed through December," Rickson said.

Assuming average conditions this quarter, Energy forecasts a slight increase in wind output year over year after 15 GW of new turbines were added across Europe in 2024.

Hydro, however, is forecast to fall compared to last year's exceptionally wet winter and spring, notably in Iberia, where reserves are low, although stocks are strong in the Nordics.

With record solar additions only making a material difference from March, gas-fired power plants will be needed to fill gaps in wind and hydro.

Overall Q1 gas-fired generation is forecast to dip by around 7% year over year, but there is upside risk from the weather, as seen in Nov/Dec 2024, when gas plants registered their first consecutive monthly year-over-year output increase since Oct/Sept 2020.

Rising gas prices shifted generation economics further in favor of coal, but switching potential is limited to Germany, the Netherlands and some East European markets.

The restart of the 1.1-GW Datteln-4 coal plant in February could cap further upside for German gas after 2024 output exceeded GB gas-fired generation. German lignite could also benefit from relatively low carbon prices.

Nuclear, meanwhile, may rival wind supply in Q1 after French reactor availability improved. Output in January could peak above 55 GW for the first time in six years, ahead of early maintenance in February.

The Flamanville-3 reactor, which connected to the grid on Dec. 21, will boost French fleet capacity to 63 GW as testing continues.

Finally, demand is forecast to rise 2.6% year over year in Q1, assuming average temperatures. "After observing lackluster growth of 1.0% in 2024, we now see EU10 demand rising 1.9% in 2025 and 2.2% in 2026, but even with this revision, downside risk remains," Rickson said.

Click here for the full-size infographic

Carbon support builds

The suspension of Russian gas flows via Ukraine has provided a steady boost to the European carbon complex, with traders and analysts predicting further upside on the back of gas-to-coal switching, boosting demand for EUAs.

Analysts with Energy expect EUAs to rise close to Eur80/mtCO2e in February and average Eur77.50/mtCO2e in Q1 2025.

"Overall, the EUA market is expected to gradually recover in 2025, with rising fossil fuel prices and regulatory changes influencing trends, though volatility may occur due to external factors," they said.

The behavior of investment funds in recent weeks also shows sentiment turning more positive, with many increasing their net-long positions, suggesting confidence in the European carbon market.

However, macroeconomic concerns remain a counterbalancing factor due to the pace of industrial decline in major EU economies.

Nevertheless, the expectation is that European TTF gas prices will continue as a major driver for EUAs in the first few months of 2025.