UK Energy Market Analysis - June 2025

It has been a volatile month in energy markets, with sharp movements in oil and gas prices driven by the rapidly evolving situation in the Middle East. A shutdown of the Strait of Hormuz now appears unlikely, and the risk premium that had built up in forward contracts has quickly disappeared. Meanwhile, the ongoing heatwave has pushed short-term power prices up, especially on the continent, with day-ahead baseload clearing above €100.00/MWh on several occasions. Looking ahead, assuming stable exports from the Middle East, long-term contracts are expected to continue falling in the coming weeks, thanks to a weakening US dollar, the anticipated impact of trade tariffs, and rising global LNG supply.

Economic Environment

• UK employment fell at the steepest rate in five years, while wage growth slowed more than expected in May, as the labour market weakened following Chancellor of the Exchequer Reeves' decision to increase the cost of hiring.
• Eurozone inflation declined to 1.9% in May, falling below the European Central Bank’s 2% target for the first time in seven months. In response, the ECB reduced its interest rate by 0.25% to 2.00% this month.
• British business activity expanded modestly in June, as new orders rose for the first time this year; however, employers accelerated job cuts and remained cautious amid tensions in the Middle East. In Germany, private sector output returned to growth, driven by a recovering manufacturing sector reporting its strongest increase in new orders in over three years.

Oil

• After a relatively quiet start to the month, Brent prices surged from $65/bbl to $84/bbl due to the latest conflict in the Middle East, which raised concerns about potential supply disruptions. However, prices have since retreated sharply—to $67.50/bbl—following President Trump’s announcement of a ceasefire, which helped reduce the associated risk premium.
• OPEC+ agreed in June to raise oil output by 411,000 barrels per day in July. This fourth consecutive rollback of production cuts means the 2.2 million-barrel-per-day reduction could be fully unwound by October.
• According to the Energy Institute, China’s oil demand may have already peaked in 2023, with consumption declining 1.2% to 16.4 million barrels per day. The drop, driven by an economic slowdown and a rapid shift to electric vehicles, could hasten the onset of a global oil demand plateau.

Gas

• Israel has resumed operations at its Leviathan and Karish natural gas fields, which had been shut down since 13 June. These fields supply most of Israel’s gas exports to Egypt and Jordan, and their closure had caused disruptions, including halted production at Egyptian fertilizer plants.
• The EU Council and Parliament have reached an agreement to extend gas storage rules until the end of 2027, allowing more flexibility to reach the 90% target between 1 October and 1 December instead of the current 1 November deadline. The deal permits deviations of up to 10% in difficult market conditions, with potential for further flexibility through EU executive action. A formal adoption, with a final parliamentary vote, is expected on 8 July.
• The European Commission has proposed banning new Russian gas and LNG contracts from 1 January 2026, with existing short-term contracts ending by 17 June 2026 and all long-term imports phased out by end-2027. Landlocked countries like Hungary and Slovakia may continue limited imports under current agreements until then. The proposal requires approval by at least 55% of EU countries, representing 65% of the population (a qualified majority vote).
• Canada has produced its first-ever LNG this month from a new facility in Kitimat, British Columbia, the first in North America with direct access to the Pacific. Initial output will come from Train 1, which has a capacity of 6.5 million tonnes per annum but will operate at half capacity for now due to technical issues. The facility’s total capacity is expected to reach 14 mtpa once fully operational.

Power

• Europe's hydroelectric power generation fell by 13% in the first five months of 2025 compared to the previous year, driven by below-average snowpack in the Alps and weak spring rainfall. May's output of 71 terawatt hours was the lowest for that month since 2017. As a result, utilities are increasingly relying on gas and coal, with the risk of further dependence if dry conditions continue.
• France’s nuclear safety authority ASNR is awaiting full results from investigations into two cracks found at EDF’s Civaux 2 reactor before deciding on any action. The cracks were on welds replaced during EDF’s 2022 corrosion probe, and no similar defects have been found so far. Of the sixteen French reactors most sensitive to stress corrosion, nine have been tested, four will be inspected this year, and the remaining three next year.
• Power prices for Winter 25 mirrored the volatility of the oil and gas markets during the recent geopolitical events. They rose by as much as 14% at their peak but ended the month down 3%, as the risk premium that had built up quickly faded.

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