Power struggles: what the Middle East conflict means for European power markets

Recurring ceasefire breakdowns and misaligned US–Israeli objectives continue to ensure that a durable Middle East peace agreement and the reopening of the Strait of Hormuz remain elusive. This has prolonged uncertainty about the passage of liquified natural gas (LNG) vessels through the Strait and sparked immediate volatility in the European gas and power markets. 

Any sustained disruption to vessel traffic is likely to raise near-term gas prices, create economic headwinds and have direct effects on power prices and baseload demand. This would ultimately lead to gas demand destruction as the transport and heating sectors accelerate electrification in a bid to ward off the consequences of interruptions to fossil-fuel transport. 

To supplement our May 2026 long-term outlook ‒ our base-case scenario ‒ that the Middle East conflict will not significantly alter European power market fundamentals, despite creating meaningful short-term risk, Wood Mackenzie analysts have developed two alternative scenarios for the effects of the Middle East conflict on European power markets should a resolution not be immediately forthcoming. Fill in the form on this page for a complimentary selection of slides from our report and read on for a brief snapshot. 

How could disruption to the Strait of Hormuz affect European gas and power markets?

The European gas market was already tight before the disruption to Middle East supply. The critical difference between our two new modelled scenarios is consumers’ reaction to a lengthy uplift in gas prices. The longer the Strait remains closed, the higher gas prices will rise and the greater the potential for electricity prices to remain elevated.  

Under our Summer Settlement scenario, gas prices reflect a prolonged interruption of traffic through the Strait of Hormuz, which is resolved by the end of the summer. Tensions in the region persist, but there is no escalation. Shipments of LNG resume in September and ramp up slowly. 

The fuel adjustment is largely limited to higher pricing between 2026 and 2029, recoupling with our base case in 2030. European electricity demand remains the same as in our base case, as the near-term conflict resolution results in minimal policy intervention and additional electrification is minimal or offset by losses. This scenario would add €13/MWh to our base-case outlook in 2027. 

Under our Extended Disruption scenario, a more significant and extended adjustment in gas prices is driven by a protracted conflict, with passage through the Strait of Hormuz reinstated only at the end of 2026. In this scenario, the global LNG market is fundamentally reshaped, gas supply is lower, demand destruction occurs and prices are more volatile. 

Fuel prices diverge from our base case and do not recouple until 2038. An economic recession in the second half of 2026 cuts base demand, while the adoption of electric vehicles and heat pumps is brought forward as consumers move away from fossil fuels to avoid higher costs. The recession is short lived, with European gross domestic product (GDP) returning to pre-crisis levels in 2027, but €500 billion of annual GDP is wiped out, undermining base electricity demand. 

Under the Extended Disruption scenario, average European power prices are around €45/MWh higher than in our base case by the end of 2026 and throughout 2027, before easing by 2031 – though not without significantly reshaping power demand. However, even in this scenario, power prices remain below the peaks experienced after Russia’s invasion of Ukraine, reducing the probability of market interventions akin to those seen in 2022-23. 

What is the European power price outlook if LNG supply remains constrained?

The prolonged disruption of gas supply raises prices by €50/MWh in the near-term, before demand destruction lowers prices to base-case levels by 2030 under our Summer Settlement scenario and even further by the mid-2030s under our Extended Disruption scenario.  

Under our Extended Disruption scenario, the largest power pricing impact is seen in 2026 and 2027, although there is a persistent, material uplift in Europe through 2031. In the face of higher costs over an extended period and the loss of economic output, fundamental changes to demand under our Extended Disruption scenario have a long-lasting impact on prices through the mid-2030s and beyond. 

Italy and Ireland are likely to see the greatest impact on power prices under our Extended Disruption scenario thanks to their high dependence on gas imports. Exposure to fuel cost increases raises market power prices across the region between €33/MWh and €19 /MWh over the initial five years of our Extended Disruption case. 

Access our analysis of the Middle East conflict's impact on European power markets

To find out more about the repercussions of the Middle East conflict for European power policy and to receive a complimentary selection of charts from our report, fill in the form on this page.