Erosion of the Rules-Based System

09/03/2026

Commodity Market Dislocations and Stress

The rules-based international system is entering a period of increasing strain. Some will see this as a long overdue reduction in the reach of a post-war framework that has grown bloated over time with mandates and limitations that constrain national sovereignty. Others will lament the destabilisation of structures they regard as fundamental safeguards against a disorderly and unpredictable unravelling of social cohesion. Periods of geopolitical stress often reveal that systems designed for stability struggle when confronted with sudden supply shocks. In such moments the institutional rules governing markets do not disappear, but they begin to bend.

Against this backdrop, episodes of extreme volatility and uncertainty can act as early indicators of deeper structural change. Market dislocations often reveal where institutional pressure points are forming and where further escalation may occur. For markets accustomed to pricing assets within relatively stable frameworks, these signals can be particularly instructive. This note offers a set of observations drawn from the period immediately following the U.S.-led attack on Iran and the subsequent escalation in regional tensions. More detailed and actionable implications will follow in subsequent reports.

Taken together, these developments suggest that several institutional frameworks governing energy, materials, and trade are beginning to encounter the kinds of stresses that only emerge during genuine supply shocks.

Italian Power: An Early Signal

One of the clearest places where these stresses have begun to surface is in European energy markets. Gas prices reacted sharply following the U.S. and Israeli strikes on Iran and the subsequent disruption to shipping through the Strait of Hormuz. With a meaningful share of global oil and LNG flows normally transiting the strait, the market quickly began pricing the risk of tighter energy supply.

Under normal market mechanics, such a move feeds directly into European electricity prices. Gas remains the marginal fuel for much of the continent’s power generation, and wholesale power markets typically rise alongside gas benchmarks.

This pattern appeared across most European power hubs at the start of the week.

The notable exception was Italy.

Instead of fully tracking the regional move higher, Italian power pricing suggested markets were incorporating the possibility of political intervention into price formation. In effect, traders appeared to be pricing not only the cost of gas, but also the probability that policy measures could dampen the pass-through of higher input costs.

That divergence is instructive. It illustrates how, in periods of geopolitical stress, markets increasingly price the likelihood that governments will adjust market structures to shield domestic economies from external shocks.

Beneath these power market dynamics, however, lies a deeper structural issue in European gas markets: the growing competition with Asia for marginal LNG cargoes.

LNG Competition and the JKM–TTF Signal

The deeper structural issue for European gas markets lies in the relationship between the two global LNG benchmarks, JKM in Asia and TTF in Europe. The spread between these benchmarks effectively determines where marginal LNG cargoes are delivered.

In practice, LNG sellers allocate flexible cargoes according to netback economics. When TTF trades at a clear premium to JKM after accounting for shipping costs, Europe becomes the more attractive destination and can reliably attract discretionary LNG cargoes during the summer injection period. When the spread narrows, or when Asian prices rise sufficiently to offset freight costs, those same cargoes are more likely to move east instead.

This competition becomes particularly important during periods of supply disruption. If geopolitical tensions tighten LNG availability while Asia maintains strong demand, Europe may struggle to secure sufficient cargoes to rebuild inventories at the pace required ahead of the winter heating season.

In practical terms, this creates a strategic vulnerability. Europe’s energy security increasingly depends on its ability to remain the highest-priced LNG destination during the refill season. If that pricing signal weakens, storage injections slow and the system enters winter with a thinner inventory buffer.

In that sense, the JKM–TTF relationship effectively functions as the clearing mechanism for the global LNG market.

Coal Substitution and Carbon Dynamics

These dynamics quickly feed into the broader energy complex.

As gas prices rise and LNG availability becomes less certain, power producers begin to substitute toward coal and lignite wherever the generation stack allows. Coal combustion produces significantly higher carbon emissions than gas, which in turn increases compliance demand for EU emissions allowances under the EU ETS.

This mechanism helps explain the resilience in carbon prices early in the week. Under typical macroeconomic stress conditions, industrial commodities tend to weaken together. Instead, EU carbon prices were resilient as traders anticipated greater coal generation across the European power system.

The higher gas prices rise, the stronger this substitution effect becomes. Coal therefore re-emerges not simply as a legacy fuel still present in the system, but as a practical hedge against gas scarcity, even within systems designed to phase it out.

Policy Tensions: Carbon Flexibility and CBAM

This dynamic highlights a broader tension within European climate policy.

The European Union’s Carbon Border Adjustment Mechanism, CBAM, which entered a new implementation phase in January, is designed to extend carbon pricing to imports and prevent carbon leakage. However, the regulation itself includes an emergency provision. Under Article 27a, the European Commission retains the ability to suspend or adjust the mechanism if exceptional market disruptions threaten industrial stability.

Recent comments from German Chancellor Friedrich Merz suggest that additional flexibility may also emerge within the EU ETS itself if energy markets remain under sustained pressure. Any softening of carbon certificate requirements would weaken the current link between higher gas prices and stronger EUA demand.

In practical terms, such a shift would lower the marginal cost of coal generation at precisely the moment when gas supply risks are rising. Utilities facing tighter LNG availability and slower storage refill would have greater economic incentive to run coal plants for longer.

This would not necessarily represent a reversal of Europe’s long-term decarbonisation objectives. Rather, it reflects a familiar pattern in energy policy. When supply security becomes uncertain, regulatory systems designed for stable market conditions begin to bend.

Strategic Materials, Aluminium and the Limits of Policy Frameworks

The same institutional pressure may soon extend beyond gas and power into metals and sanctions policy.

Aluminium is already covered by the EU’s carbon border adjustment mechanism, yet a meaningful portion of global supply sits close to the same geopolitical fault lines affecting energy markets. Several large smelters in the Gulf region export material that ultimately reaches European consumers, and many of those flows pass through shipping routes linked to the Strait of Hormuz.

The link between the Gulf and aluminium markets is not purely logistical. Many of the region’s smelters operate on power systems closely tied to natural gas, meaning that disruptions to regional energy flows can affect both the movement of metal and the economics of its production. In that sense, the same geopolitical stresses currently affecting LNG markets also sit upstream of a meaningful portion of global aluminium supply.

If disruption to Gulf shipping were to constrain those exports, the pool of non-Russian aluminium available to European buyers would shrink materially. Europe would then face a more complex supply choice at precisely the moment policymakers are attempting to build resilient industrial supply chains.

In that environment CBAM risks becoming less a climate instrument and more a constraint on emergency procurement.

The most likely pressure point would not be the outright suspension of CBAM, but a softer interpretation of its implementation. Policymakers could slow the removal of free allocations, adjust the treatment of embedded carbon calculations, or introduce targeted flexibility for strategic materials. The underlying political argument would be straightforward. Europe cannot simultaneously demand secure non-Russian supply, maintain industrial competitiveness, and raise the cost of the marginal tonne during a supply shock.

A similar logic may also begin to appear in oil markets. Reports that Washington has granted India temporary latitude to receive Russian barrels already in transit suggest that sanctions enforcement may become more flexible when price stability becomes a policy priority. Such measures do not necessarily represent a reversal of sanctions policy, but they demonstrate that enforcement can become contingent when markets tighten.

In both metals and energy the same pattern emerges. When supply security becomes the dominant concern, frameworks designed for orderly peacetime transitions begin to adapt.

LNG is the Fulcrum

What becomes evident across these developments is that the same geopolitical shock is now transmitting across multiple systems. Europe competes with Asia for marginal LNG cargoes, power markets are adjusting to the prospect of greater coal utilisation, carbon frameworks are beginning to encounter political flexibility, and strategic metals such as aluminium face supply risks along the same maritime corridors. The stress currently visible in energy markets may represent a broader test of the frameworks governing global resource flows.

The Strategic Implication

Europe may struggle to rebuild storage inventories over the summer. A weaker refill trajectory would prolong coal usage, increasing pressure on both carbon markets and the policy frameworks that govern them. Europe may ultimately be forced to choose between paying Asia’s price for LNG or lowering the regulatory cost of burning coal.

In either case, the result would illustrate a familiar pattern. When energy security tightens, policy frameworks designed for stable conditions begin to bend.

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