European natural gas prices plunged at the start of trading on Monday after U.S. President Donald Trump announced he had called off a planned attack on Iranian energy sites and that negotiations on a deal would commence this week.

Europe's benchmark contract, Dutch TTF Natural Gas Futures, dropped 4% at the open on Monday, mirroring a 5% slide in oil prices driven by renewed expectations that Washington and Tehran are seeking a return to diplomacy. The TTF contract has served as the continent's primary gas pricing reference since Europe's pivot away from Russian pipeline gas following the 2022 invasion of Ukraine heightened sensitivity to any disruption affecting global LNG supply.

However, gas prices recovered part of their losses by midday as Europe grapples with yet another heatwave that is driving up electricity demand. The extreme heat and a prolonged lack of rainfall have pushed Danube water levels to their lowest point in nearly 90 years, forcing both Hungary and Romania to reduce output at nuclear power plants that rely on the river for reactor cooling.

Hungary was set to shut down the Paks Nuclear Power Plant on Monday—the first such shutdown in the facility's 44-year history—due to the continuing decline in Danube water levels, Hungarian Prime Minister Peter Magyar announced on Sunday. Paks typically supplies roughly half of Hungary's electricity, underscoring how climate-driven river conditions are now compounding Europe's energy security challenges.

While Europe's domestic power challenges are limiting the downward pressure on benchmark gas prices, revived diplomatic hopes in the U.S.-Iran conflict have alleviated some concern over the tight global liquefied natural gas (LNG) market. Qatari cargoes are still not flowing freely through the Strait of Hormuz out of the Persian Gulf—a chokepoint through which roughly a fifth of global LNG exports transit—but a temporary agreement and a halt to attacks on tankers could allow more gas to exit the Middle East in the coming weeks.

In the currently tight global LNG market, Europe is losing the competition with Asia for spot LNG supply, as Asian demand and prices exceed those in Europe.

Furthermore, Europe is on track for its second-lowest gas storage level for this time of year in 15 years—well below the five-year average—spurring a race against time to secure LNG supplies ahead of winter. Under EU rules adopted after the 2022 energy crisis, member states are required to reach 90% storage fill by November 1, making every cargo critical as the deadline approaches.

By Michael Kern for Oilprice.com