The situation in the Middle East shows no signs of easing – What it means for Electricity Prices

In March, we last published an article on the situation in the Middle East. At that time, we noted that from an electricity price perspective, the key question would be what the situation looked like once summer had passed. Now, as we approach the end of August, the situation appears in many ways just as deadlocked as it was nearly six months ago.

How does the situation in the Middle East affect market expectations?

Uncertainty is detrimental to markets regardless of the commodity involved. The main reason is that reliable availability is essential for pricing goods with minimal risk premiums.

The greater the uncertainty, the higher the risk premium.

Looking at electricity futures prices in August, prices for the final quarter of this year are approximately 70% higher than they were a year ago. For the first quarter of next year, prices are nearly 40% higher in comparison to pricing of the first quarter of 2026.

Energy market price expectations are primarily influenced by energy availability, fuel and emission allowance prices, demand forecasts, reliability of transmission connections, operational performance of major generation facilities, and market confidence in the future.

For electricity prices in Finland and the Nordic region, developments in the Middle East primarily affect energy availability, especially natural gas supplies to Europe, fuel prices, and overall market sentiment.

What is the outlook for natural gas supply in Europe?

European gas storage levels remain historically low. At the time of writing, storage facilities are approximately 60% full, whereas levels would typically be approaching 80% by the end of summer.

Despite the disruption in the Strait of Hormuz, storage facilities have continued to be replenished, albeit at a slower pace. Higher gas prices have contributed to the slower refill rate. In addition, a relatively cold end to the winter season in Europe led to greater-than-normal withdrawals from storage.

Natural gas imports from Russia have also declined steadily for several years and agreed transition periods are approaching their end.

High temperatures have further increased natural gas demand. Europe has therefore had to compete with Asia for liquefied natural gas (LNG) supplies, as demand in Asia has risen due to increased cooling needs. During the summer, natural gas consumption also increased by as much as one-third year-on-year in several European countries.

At the same time, the production in some nuclear power plants in France was temporarily paused due to exceptionally high temperatures.

What is the situation with Nordic hydropower reserves?

The Nordic hydrological balance, which reflects water reservoir levels and available hydropower resources, remains below normal. In our market review in spring, we noted that the energy content of reservoirs in Norway and Sweden was approximately 20 terawatt-hours (TWh) below normal levels. Since then, summer rainfall has improved the situation somewhat, but reservoir levels are still around 10 TWh below normal.

How cold will the coming winter be?

If only we knew. According to the Finnish Meteorological Institute, long-range weather forecasting remains challenging. Weather variability is particularly high at northern latitudes, including Finland, making accurate forecasts even more difficult.

Winter temperatures are an important factor because they directly influence electricity demand.

For this reason, electricity futures prices are based on demand forecasts for a so-called normal winter, rather than on exceptional weather events such as the unusually cold periods experienced in January and February last winter.

Electricity futures do not reflect the actual market price that will ultimately materialise during a specific period. Instead, they represent the market’s assessment of future price levels.

While futures prices do not directly determine the realised price of spot prices, they have a significant impact on electricity contracts being priced today. This can be seen in fixed-term electricity contracts, where prices have increased, as well as in open-ended products whose prices are updated periodically, for example on a quarterly basis.

Our advice to consumer customers

What should consumers do then, when headlines are filled with warnings about electricity prices this winter?

Our advice is to consider what higher electricity prices could mean for your household budget, peace of mind, and ability to adjust the amount and timing of your electricity consumption.

Based on those considerations, choose the electricity product that best suits your needs.

External sources:
Power-Deriva Oy, Finnish Meteorological Institute, GIE AGSI (agsi.gie.eu)