Macro

Italy’s Natural Gas Premium Hits €3.50/MWh Amid Heat Wave Demand

Italy's natural gas prices surge €3.50/MWh above Spain's due to heat wave-driven demand.

By Athena Xu

7/11, 03:58 EDT
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Key Takeaway

  • Italy's next-day natural gas premium surged to €3.50/MWh over Spain, the widest spread since April, driven by a heat wave.
  • Italy's grid relies heavily on natural gas for power and cooling, unlike Spain which uses more renewables.
  • Southern Italy faces "extreme danger" of fire with temperatures in Rome expected to reach 33-35C (91-95F) this week.

Italian Gas Prices Surge

Italy's natural gas prices for next-day delivery have surged, trading approximately €3.50 per megawatt-hour higher than equivalent contracts in Spain this week. This marks the widest spread since April and highlights a significant increase in demand for natural gas in Italy. The surge is driven by a heat wave gripping southern Europe, leading to higher electricity consumption, particularly in Italy where the power grid relies heavily on natural gas. According to grid operator Terna SpA, traditional thermal power plants are contributing to about half of Italy's actual generation, with solar and wind power making up only a fraction of the total. In contrast, Spain's gas demand has been sluggish, with power sector consumption slumping 46% in the first nine days of the month compared to a year earlier, as reported by operator Enagas SA.

Heat Wave Impact

The heat wave has led to extreme weather conditions across Mediterranean Europe, with Italy experiencing particularly severe impacts. Maxar Technologies Inc. forecasts that maximum temperatures in Rome will hover around 33-35°C (91-95°F) through the end of the week. The "extreme danger" of fire is present in parts of southern Italy, and large areas of Sicily face severe wildfire risks. These conditions have exacerbated the demand for natural gas as the country relies on it for power and cooling needs. The increased demand has pushed Italian gas prices higher, reflecting the strain on the energy infrastructure.

European Gas Market Dynamics

The broader European gas market has also seen fluctuations. Front-month Dutch futures, the European benchmark, traded at €30.56 per megawatt-hour by 9:32 a.m. in Amsterdam on Thursday. Despite the recent month-long retreat in natural gas prices, Bloomberg Intelligence analyst Vincent G. Piazza suggests that the worst is likely over for tumbling natural gas. Warmer weather is boosting gas consumption, tightening commodity balances, and sustaining prices. Piazza notes that the storage surplus, which is 18.8% above the five-year norm, should continue to shrink. However, risks such as slowing global economies, central bank policies, concerns about China’s growth, and geopolitical conflicts remain.