European energy markets are expected to navigate a turbulent second half of 2025, with analysts projecting upward pressure on gas, power and carbon prices amid tight global LNG supply, weather-related power generation challenges, and geopolitical uncertainties, according to a new report by Independent Commodity Intelligence Services (ICIS) on Thursday.
The report highlighted that despite an early-year spike in energy prices followed by a partial recovery, market fundamentals remain fragile, with limited prospects for a significant decline in prices.
European power demand recovery has stalled, growing just 0.6% in the first five months of 2025, far below earlier projections of 1.6% annual growth.
ICIS' Power Demand Index indicates that the region continues to face a slow rebound from the energy crisis of recent years.
In the gas sector, demand in Western and Central Europe is forecast to rise 1.9% in 2025 compared to 2024.
This modest recovery, driven mainly by residential and commercial consumption, remains 17% below pre-COVID levels. Industrial demand, however, remains flat due to persistent economic headwinds.
- LNG tightness and storage uncertainty
Global LNG markets are projected to remain tight throughout the year despite expected production increases of 23-24 million tonnes.
With over 38% of Europe's gas supply dependent on LNG, competition with Asia for cargoes is likely to intensify.
Adding to the uncertainty is a lack of clarity around EU gas storage targets for winter 2025/26.
While EU-wide obligations are expected to be reduced from 90% to around 83%, major states such as Germany and the Netherlands have already adopted lower unilateral targets, raising concerns about winter preparedness.
Carbon markets are also poised for volatility. Analysts remain bullish on EU Allowance (EUA) prices, driven by anticipated deficits exceeding 100 million tonnes in 2026 and 2027.
UK Allowances (UKAs) are similarly projected to trend higher, particularly amid progress toward linking the UK and EU emissions trading systems. However, the timeline for formal linkage remains uncertain.
According to the report, unfavorable weather has already led to a 10.6% year-on-year increase in power sector emissions, largely due to reduced wind and hydropower output.
If low wind conditions persist, analysts warn that fossil generation may continue to fill the gap, further increasing emissions and supporting higher power prices.
Overall, ICIS analysts expressed a predominantly bullish view across the European energy complex for the remainder of the year.
LNG supply constraints, limited progress on storage, and weak renewable generation create an environment where even modest demand fluctuations could significantly impact prices.
The report also warned of potential market disruptions from infrastructure failures and LNG project delays, particularly in the face of an active hurricane season in the US Gulf region.
While bearish risks, such as demand weakness and policy intervention in carbon markets, exist, the overall risk profile leans towards price increases.
"The current balance of risks suggests that the second half of 2025 will remain volatile and skewed toward price upside," the report concluded.
By Murat Temizer
Anadolu Agency