Energy market analysis March 5, 2025

“Backwardation is often interpreted as a sign of limited supply, with traders now willing to pay a premium for fuel that is previously available.”

European diesel futures contracts were also already signaling tightness . Diesel contracts with short-term delivery reached high levels of backwardation in mid-February. A situation in which forward contracts with urgent delivery are more expensive than contracts further down the forward curve. Backwardation is often interpreted as a signal of limited supply, with traders willing to pay a premium for fuel that is available sooner.

Germany, France and Italy came up with the proposal to ease EU gas buffer requirements to normalize the market. Under current European Commission regulatory mandates, all EU countries are required to have their storage caverns filled to 90% capacity by November, with interim fill targets in February, May, July and September.

Currently, EU gas storage is less than 45% full. That is well below last year’s 67% and below the 10-year average of 51% for the same period. So it will be difficult and possibly expensive to reach the required 90% by Nov. 1, 2025.

Gas withdrawal this season on the continent is greater than previous two winters due to colder weather, lower wind production due to low wind speeds and the termination of Russian gas imports through Ukraine. The situation is even more dire in Germany, with storage only 33% filled. A significant drop from the 72% at the same time last year.

Higher temperatures in northwestern Europe along with increasing LNG imports are now contributing to less rapid drawdown. Markets are also beginning to discount a potential return of more Russian gas to Europe. According to Tyler Richey, co-editor at Sevens Report Research, a cease-fire of the Russia-Ukraine war could be negative for oil and gas prices should Trump insist on lifting sanctions on Russia’s energy industry.

The most recent sanctions by the Biden administration roughly tripled the number of directly sanctioned Russian crude oil tankers. Enough to affect 900,000 barrels per day (bpd). While Russia will most likely try to circumvent the sanctions via even more shadow fleet tankers and ship-to-ship transfers.

Price Crude oil – Brent May 2025 ($/barrel) – day cloud candle, log scale

“Current regulations are too complex and do not encourage distribution network operators (DNOs) to make the proactive investments needed to increase network capacity and provide resilience to future climate impacts.”– National Infrastructure Commission UK

Britain needs up to $63 billion in investment in the national electricity grid to support additional demand and generation through 2050. That’s double the current rate of additional investment, on top of the usual investments, such as end-of-life asset replacement. So says the National Infrastructure Commission, the government’s independent infrastructure advisor. Investment between $47 billion and $63 billion is likely to be needed by the year 2050 as a step change in investment in Britain’s local electricity networks becomes necessary. These investments would be essential to achieve the government’s growth mission and reduce long-term energy costs for consumers, according to this commission’s report.

This report also states that with demand expected to double by 2050, the current rate of additional investment in power grids should also double. This will ensure that the system can meet increasing demand and be more quickly connected to new sources of renewable electricity and new electricity demand. However, investment is constrained by legislation.

The current regulation of government regulator of Britain’s electricity and natural gas markets, Ofgem, is too complex. It discourages grid operators from making proactive investments needed to increase grid capacity and resilience to future climate impacts, the commission said.

In the National Infrastructure Commission report, the consultant calls for a more proactive approach to both energy regulation and system planning. Ofgem would like feedback on its proposed changes to grid connection policy from a “first come, first served” approach to prioritizing projects where generation capacity is most needed and already in advanced stages of development. The regulator would like to reform the current regulation around connection. It has become inadequate as some, early projects fall behind schedule, while more advanced projects must wait years before they can be connected to the grid.

Price Baseload Electricity supply year 2026 (eur/MWh) – week cloud candle, log scale

“I told the European Union to make up for their huge deficit with the United States by buying our oil and gas on a large scale. Otherwise, it’s IMPORTS all the way!!! – Trump

Europe’s natural gas extraction this winter has not been this large in years. Driven by lower temperatures, decreased electricity production due to less wind and the cessation of Russian gas imports through Ukraine. The situation is especially dire in Germany, where electricity prices have skyrocketed and the industrial base continues to be eroded. Relief is coming from America, however, as record high LNG exports help refresh Europe’s depleted reserves.

The latest data from BloombergNEF show that U.S. pipeline gas toward LNG export plants reached a record volume of 445 million cubic feet as of Feb. 18, an all-time high that is nearly 20% higher than a year ago. Rising LNG exports have crowned America the world’s largest supplier of LNG. A number of statistics show that U.S. production could double by the end of the decade if demand from Europe and Asia continues to rise.

Since the war in Ukraine intensified in 2022, U.S. LNG exports to Europe have surged. Thus, in effect, America has become the Europeans’ largest gas supplier. According to Bloomberg, Europe has mainly turned to American LNG to help replace the loss of Russian pipeline gas since the 2022 invasion of Ukraine. More supply from America could bring relief to LNG buyers in Europe and Asia who are struggling with higher prices.

In late 2024, Samantha Dart, co-Head Global Commodities Research at Goldman Sachs wrote that it was theoretically possible that LNG exports from the U.S. Gulf could replace all Russian natural gas heading to the EU. Her note came shortly after President Trump threatened to impose tariffs on the EU on “Truth” Social if large-scale oil and gas purchases are not made. Trump’s “America First” policy will drive even more U.S. LNG shipments to Europe as the EU seeks to avoid a tariff dispute with Washington.

Due to tight supplies in Europe, the Dutch Day Ahead natural gas price on the TTF increased by nearly 157% compared to the price floor of €22 per megawatt hour a year ago.

In the Netherlands, total gas supplies were a quarter full on March 3. Due to the purchase of LNG and the other European gas supplies, the dwindling stock does not yet lead to panic. Last February, the filling level dropped slightly below the EU standard, see chart below.

The front month price on the Title Transfer Facility (TTF) closed below €45 per megawatt hour on Friday, Feb. 28. Another 2-year high of € 59 was reached on February 10. On Monday, March 3, the market closed marginally higher.

Price TTF gas supply year 2026 (eur/MWh) – day cloud candle, log scale

“The world runs on hydrocarbons and for most applications we have no substitutes.” – Chris Wright, U.S. energy secretary

U.S. Energy Secretary Chris Wright has condemned the 2050 net-zero emissions pledge as a sinister goal, criticizing Britain’s clean energy policy, according to Reuters. British Prime Minister Keir Starmer has made clean energy central to his economic strategy, focusing on offshore wind for job creation and growth.

Wright said at a conference in London that Net Zero 2050 is a terrible goal. Its aggressive pursuit has brought no benefits to Britain, only enormous costs. According to Wright, the government must clear the way for oil, gas and coal production. The net-zero push, he says, has lowered living standards and shifted emissions overseas.

China is far from finished with its massive use of fossil fuels. Thus Vaclav Smil, policy analyst and scientist. Coal production reached a new record in 2022. The country approved the construction of 106 gigawatts of new coal-fired power, the highest capacity since 2015. India is very likely to follow China’s lead as its 1.4 billion people push for higher living standards.

Price ICE Coal delivery year 2026 (usd/t) – week cloud candle, log scale

“Despite international agreements, government spending, regulations, and technological advances, global fossil fuel consumption increased 55 percent between 1997 and 2023.” –Vaclav Smil, policy analyst and scientist

In 2015, the Paris Climate Accord set a goal of reducing greenhouse gas emissions to net zero by 2050. This should be achieved through a combination of renewable energy, efficiency gains and CO2 capture.

Vaclav Smil, one of the leading thinkers on energy and the environment, wrote a 2024 comprehensive report for the Fraser Institute, a libertarian-conservative Canadian think tank. Smil cites several reasons why Net Zero is highly unlikely by 2050.

Fossil fuels represent a declining share of the total energy mix. These fuels have decreased from 86% in 1997 to 82% in 2022. However, their use is still increasing in absolute terms as energy demands continue to rise. But why not electrify everything and replace fossil fuel energy with renewable and nuclear? We have the technology and 25 years is a long time.

Smil describes the enormity of such an undertaking and why a quarter century is only short on the time scale of energy transitions. The first global energy transition, from traditional biomass fuels such as wood and charcoal to fossil fuels, began more than two centuries ago and was gradual. That transition is still not complete, as billions of people still rely on traditional biomass energy for cooking and heating.

There is another obstacle: the large-scale incorporation of variable energy sources such as wind and solar on an aging power grid. The IEA has estimated that to meet global decarbonization targets, more than 80 million kilometers of transmission networks will need to be added or refurbished by 2040. That is equivalent to the entire existing global network by 2023.

According to McKinsey’s Global Institute, spending the size of 10% of global GDP would be required over 30 years. Targeted spending on this scale has not occurred since World War II. Smil therefore concludes that we should focus our efforts on charting a realistic future that takes into account our technical capabilities, our material supplies, our economic possibilities and our social needs. And then devise practical ways to achieve them. We can always strive to surpass them. A far better goal than recharging ourselves after repeated failures by clinging to unrealistic goals and impractical visions.

Price Emission Rights – Dec-25 contract EEX (eur/t) – day cloud candle, log scale