Jan26 Energy Market BriefJan26 Energy Market Brief: Storage Levels Help Keep Markets Calm

Wholesale energy markets closed out 2025 with December characterised by ongoing volatility, driven more by short-term fundamentals and sentiment than by any single structural shift in supply. While prices did not trend decisively higher or lower across the month, frequent daily movements reinforced the reality that energy markets remain highly reactive to weather forecasts, gas market dynamics and broader macroeconomic signals.

In this Jan26 Energy Market Brief, we explore the implications of recent market trends.

Gas markets continued to dominate pricing behaviour across the energy complex. European gas storage entered winter at relatively healthy levels compared to recent years, providing a degree of reassurance to the market and helping to prevent sustained price rallies. However, this underlying comfort was repeatedly challenged throughout December by changes in weather models, uncertainty around LNG flows and wider geopolitical considerations. As a result, gas prices frequently reacted to short-term risk rather than long-term fundamentals.

Colder weather forecasts, even when short-lived, prompted sharp upward movements in prompt and near-term gas contracts, particularly when accompanied by concerns over LNG delivery schedules or regional supply tightness. Conversely, when forecasts shifted milder or LNG availability appeared more secure, prices softened quickly. This pattern highlighted a market that remains balanced but nervous, with limited tolerance for perceived risk during the core winter period.

UK power markets continued to closely track movements in gas, reinforcing the strong correlation between the two commodities. Day-ahead and front-month power prices were especially sensitive to changing demand expectations and renewable generation assumptions. Periods of lower wind output combined with colder weather forecasts pushed prompt power prices higher, while improved renewable output and milder conditions eased prices just as quickly.

The intermittency of renewable generation remained a key factor throughout December. Wind output forecasts played a significant role in shaping daily price movements, particularly during periods where gas prices were already elevated. This interaction between gas pricing and renewable availability continues to be a defining feature of the UK power market, increasing short-term volatility and reinforcing the importance of understanding non-commodity cost exposure for consumers.

Further along the power curve, price movements were more muted. Forward contracts, including calendar year products, traded within relatively defined ranges. While there were modest upward and downward adjustments during the month, there was no sustained directional move. This suggests that the market currently views medium-term supply fundamentals as broadly adequate, even if short-term risks remain elevated during winter.

Carbon markets provided an underlying level of support to power prices, though they were not the primary driver of market direction during December. UK ETS prices remained sensitive to wider macroeconomic sentiment, reflecting concerns around industrial demand, economic growth and longer-term decarbonisation policy. While carbon continues to form a structural component of power pricing, its influence during the month was secondary to gas and weather-related factors.

Macroeconomic conditions continued to exert a noticeable influence on wholesale energy markets. Financial market sentiment, interest rate expectations and currency movements all played a role in shaping daily price action. Energy markets remain increasingly intertwined with wider financial markets, meaning shifts in risk appetite or economic outlook can quickly feed through into commodity pricing, even in the absence of fundamental supply changes.

Geopolitical considerations also remained an underlying theme throughout December. While there were no major new supply disruptions, ongoing global tensions contributed to a persistent risk premium within gas markets. This premium tended to expand or contract in response to news flow rather than concrete events, reinforcing the importance of sentiment as a pricing driver.

Looking ahead into January and the early part of 2026, the market remains finely balanced. Much will depend on how the remainder of winter unfolds, particularly in relation to sustained cold weather, wind generation levels and LNG flows into Europe. While current storage levels offer some protection against extreme price spikes, December’s price action demonstrated how quickly confidence can erode when forecasts turn less favourable.

Beyond the immediate winter period, attention is likely to shift toward refilling storage for summer 2026 and the availability of LNG on the global market. Competition for LNG cargoes, particularly from Asia, remains a key longer-term risk factor. Any tightening in global LNG supply could place upward pressure on European and UK gas prices, with knock-on impacts for power markets.

From a procurement perspective, December reinforced the importance of active market engagement. The absence of a clear trend does not equate to low risk; instead, it increases the value of flexibility, structured purchasing strategies and informed decision-making. For customers exposed to wholesale pricing, understanding how weather, gas fundamentals and non-commodity costs interact remains critical.

For fixed-price customers approaching renewal, the current market environment presents both opportunity and challenge. While prices are not at the extreme highs seen in previous years, volatility remains elevated, and timing decisions continue to carry material financial implications. A clear understanding of budget tolerance, risk appetite and contract structure is essential when navigating this market.

Overall, December 2025 served as a reminder that wholesale energy markets are unlikely to return to the low-volatility conditions that existed historically. Instead, price movements are expected to remain reactive to short-term drivers, with sentiment often moving faster than fundamentals. As we move into 2026, proactive energy management, flexibility where available and a clear grasp of market dynamics will remain central to managing cost and risk effectively.