Energy Market Update: 2025/26

Prior to the recent escalations in the Middle East, Gas prices had fallen over the last 12 months up to the beginning of March this year, with power prices relatively flat. The key contributing factors are examined below. 

1)     Geo-politics

In common with recent years, geo-political events have had a major influence on global energy prices over the last 12 months, commencing with so-called ‘Liberation Day’ on April 5 last year, when a wide and varying range of tariffs were announced by President Trump. The potential impact on global economies and energy demand saw falls in UK and European gas and power prices – UK gas prices for 25/26 fell 18% by the end of April. The uncertainty created by the tariffs, which have constantly changed in magnitude and legality, has continued to influence the market throughout recent months, and are likely to continue to do so.

Events in Ukraine and the Middle-East have also been a major driver in the markets in the last 12 months. An escalation in the tensions between Israel and Iran in June 2025 with an exchange of missiles and concerns of further escalations in the region. An announcement of a cease-fire by President Trump resulted in a sharp fall in prices, back to the pre-escalation levels.

A far more serious and potentially wider-ranging escalation in tensions occurred at the beginning of March this year with US/Israel missile attacks on Iran and the killing of the Iranian supreme leader. As a result we have seen more than the normal retaliatory missiles fired by Iran into Israel, but also missiles fired at Gulf-states and targeting Qatari LNG facilities. In addition, the Strait of Hormuz through which Qatari LNG travels en route to Asia or Europe has effectively closed. If this is anything other than temporary, then we are likely to see an increase in global gas prices as competition for US LNG intensifies. We have already seen increases in UK gas prices of approximately 40-50% for the coming year.

2)     Carbon

Carbon prices relate to the cost of carbon allowance or credits, where one credit typically permits the emission of one metric ton of CO₂ and have been a big driver in power prices over the last 12 months. Widely forecast to increase consistently throughout 2025 and 2026, prices increased by approximately 47% from April 2025 to mid-January. This supported power prices for both 25/26 and 26/27 from early November. Plans to link the UK carbon scheme with the more expensive EU scheme provided additional support to UK carbon prices.

The cost of carbon on European industry has become more of a focus this year with opposition from some of the major European countries to EU plans to limit the availability of credits in the coming years, aimed at forcing prices higher. This opposition has seen a sharp fall in carbon prices in the last month with power prices falling likewise, as it appears likely that the EU will be forced to revise their plans.

3)   Gas Storage

The importance of gas storage has grown due to reduced Russian gas flows. Gas is traditionally injected into storage in summer when demand and prices are low, for winter use during high demand. With the loss of Russian gas, storage withdrawals now supplement other sources throughout winter. The EU has intervened in recent years and set storage targets for countries to aim for. These were relaxed somewhat last year and as a result levels as we entered winter we lower than previous years. Strong withdrawals prior to Christmas depleted levels further and with the colder weather of January and a colder outlook for the rest of winter it appeared that there would be insufficient storage to last the winter, pushing up gas prices. With a return of milder weather, however, levels have stabilised although we are likely to end winter substantially below previous winters, supporting gas demand and prices during this summer as gas is injected back into storage.

4)     Liquified Natural Gas (LNG)

LNG is natural gas, that is cooled to a liquid state, reducing its volume significantly for easier transportation. The UK and Europe import LNG, mainly from the US and Qatar to supplement pipeline gas from Norway. With reduced Russian gas flows, LNG has become crucial for meeting demand. However, it is more price sensitive than pipeline gas, with Europe competing against Asia for supplies.

Global LNG supply is forecast to increase sharply in the coming months, as first the US and then Qatar ramps up production. The chart below illustrates the predicted annual growth in LNG capacity in the next four years, from projects which have already been financed. Overall, LNG supply is forecast to increase by 54% from 2024 levels by 2030. This anticipated growth helps to explain the lower gas and power prices that we are seeing for future years, and why the markets are less concerned with the current low gas storage levels – the expectations are that increasing LNG supply this summer will help refill storage sites.

5)     Weather

Weather significantly affects energy prices, mainly due to temperature changes in winter that increase heating demand for gas. Prior to Christmas last year, the long range forecasts suggested a relatively mild winter and this optimism contributed to falling gas and power prices for, despite the relatively low level of European gas storage. Colder weather in January provided some support to prices, but this proved somewhat limited.

6)     Outlook

 Strong market fundamentals in terms of positive weather forecasts for early spring and a continuation in the growth of LNG supply will be over-shadowed by events in the middle-east and gas and power prices subject to how the situation evolves and escalates. The threat to Qatari LNG supply is particularly key and could offset the anticipated growth in LNG.