Key highlights
- Geopolitical influence on commodity markets volatility: Geopolitical events like elections, conflicts, sanctions, and tariffs have amplified risks in energy markets, impacting oil, gas, power, and carbon sectors
- Energy inflation to decrease by end of 2026: Despite current volatility, energy markets inflation is expected to drop significantly by end of 2026 due to increased oil and liquefied natural gas (LNG) supply and weak oil demand forecasts, though volatility expected to continue
- Solar energy growth: Solar energy capacity has surged by over 160% in the past five years, driven by regional factors such as domestic panel supply in China, energy security in the EU, and price competitiveness in the US. Power Purchase Agreements (PPAs) are expected to boost solar projects, ensuring long-term stability
In the tumultuous landscape of 2025, as with most markets, volatility has become the defining characteristic of energy markets and the wider commodity markets. Against this backdrop, the recent International Energy Week provided a timely opportunity for BNP Paribas to engage with clients and market participants in an insightful panel discussion, delving into the intricate dynamics shaping energy markets across various sectors. The geopolitical arena emerged as a focal point, highlighting the profound uncertainty and volatility it has introduced into these critical markets.
Commodity markets dynamics
1. Tackling Trump, tariffs and trade wars
Geopolitical factors, including elections, regional conflicts, sanctions, and tariffs, have amplified risks and uncertainty in energy markets. These markets have been strongly influenced by macro headlines, sometimes overshadowing the underlying fundamentals.
Energy sectors such as oil, gas, power, and carbon have been notably affected by these trends. The conflicting nature of these drivers—for example, sanctions increase energy prices by reducing supply, with tariffs eventually leading to lower demand forecasts—has exacerbated market uncertainty.
Aldo Spanjer, Head of Energy Strategy at BNP Paribas, commented on the market volatility suggesting it is expected to persist through 2025 and 2026, driven by macro headlines across the energy complex.
“Despite this volatile environment, there is an expectation that energy inflation will decrease significantly by late 2026”, commented Aldo.
Despite this volatile environment, there is an expectation that energy inflation will decrease significantly by late 2026
Aldo Spanjer, Head of Energy Strategy at BNP Paribas
This is attributed to increased oil and liquefied natural gas (LNG) supply, coupled with relatively weak demand forecasts for oil. However, the journey towards this stabilisation is anticipated to be challenging and volatile.
2. The impact on power and carbon markets
The volatility in the gas market has had a ripple effect on power and carbon markets, a trend expected to continue as speculative positioning drives price volatility within energy markets. Demand for European Union Allowances (EUAs) is also projected to increase due to recovering power growth in Europe and decreases in carbon credit supply. By 2026, EUA markets could fundamentally disconnect from gas market dynamics as incoming LNG supply eases the global gas balance.
What are European Union Allowances?
EUA carbon credits, or European Union Allowances (EUAs), are part of the European Union Emissions Trading System (EU ETS), a cap-and-trade system aimed at reducing greenhouse gas emissions. Breakdown:
- Cap-and-trade: The EU ETS sets a cap on total emissions and issues EUAs, each representing the right to emit one tonne of CO2 or equivalent gases
- Allocation: EUAs are allocated to companies through free allocation or auctioning
- Trading: Companies can buy or sell EUAs based on their emissions. Those emitting less can sell their surplus allowances to companies that need more
- Compliance: Companies must surrender enough EUAs to cover their emissions by the end of each compliance period or face penalties
- Coverage: The system covers energy-intensive industries like power plants, steelworks, and manufacturing
- Phases: The EU ETS has gone through several phases, with each phase introducing stricter caps to reduce emissions further
3. Trumping the odds for sustainable investing
Global energy demand continues to rise, from the Asia-Pacific region to North America. Over the past five years, solar markets have experienced a boom, with capacity increasing by over 160%. Solar energy has become a key component of the global energy system, and utilities are expected to adopt a portfolio approach to power generation, opting for the cheapest source to deliver electricity.
Sunny skies ahead of solar energy
In the United States, solar energy is particularly advantageous during the summer months, providing excellent coverage for solar irradiation and meeting increased electricity demand for air conditioning during the day. At night, utilities can switch to other sources. This trend is expected to continue, with solar capacity at least doubling by 2030. The decrease in solar panel prices and increased production quantities are significant drivers of this growth.
However, the motivations for solar growth vary by region. In China, growth is driven by the cheap and ample supply of domestic panels. In the EU, energy security needs and 2030 emissions targets are the primary drivers. In the US, price competitiveness and the need to meet increasing power demand are the key factors. Power Purchase Agreements (PPAs), particularly in the US and EU, are expected to bring more solar projects to market by ensuring stable long-term project returns.
PPAs are a crucial mechanism in the energy market as they facilitate the development of new power generation capacity, particularly in the renewable sector.
Risks to solar development include rising and higher long-term interest rates and a lack of further grid development. Currently, the US and China are leading in grid development and overall, the momentum favours continued solar development.
For further updates on these topics, contact your BNP Paribas sales representative and visit our Commodity Derivatives solutions page. Visit Markets 360 for more insights on commodity markets and to learn about our strategy and economics offering.
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