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Gas Prices Hit a Fresh Record

LNG ship

Image © Adobe Images

UK wholesale gas for October delivery has surged to a fresh high on Tuesday, suggesting the energy crisis facing the country is only deteriorating.

Analysts say the developments come amidst intense bidding between Asia and Europe for any available seaborne gas.

"The latest surge in LNG spot prices reflects strong demand from China and Europe. Growing fears of an energy shortage in China this winter have led to Sinopec, one the largest LNG importers, to outbid European rivals," says Vivek Dhar, Mining & Energy Commodities Economist at CBA.

"Importers in North Asia, particularly China, are keen not to repeat their experience from last winter, where colder than usual temperatures and a scarcity of LNG cargoes resulted in LNG spot prices spiking higher," he adds.

But the UK enters the winter period with storage capacity virtually depleted, compared to major European economies which enter the crisis with more stocks available making the situation in UK gas markets particularly acute.

UK gas prices

Above: UK gas for October delivery, image courtesy of BarChart.

As of last week the UK stored enough gas to meet the demand of four to five winter days, or just 1% of Europe’s total available storage.

By contrast, the Netherlands meanwhile has capacity more than nine times the UK’s, while Germany’s is 16 times the size.

"European gas storage levels are tracking around ~73% of capacity – well below the 5 year average of ~88% for this time of year. The gas shortage in Europe reflects deeper cuts to Norway’s gas production and stronger gas‑powered demand," says Dhar.

The UK's limited gas storage came just as a dash for gas got underway right across the globe as economies recovering from the Covid crisis ran into disjointed supply chains and commodity markets; in turn caused by the crisis.

The UK consumer is now facing a jump in energy prices as Ofgem is expected to raise the price cap in February once again, a development that promises to fuel fears that high inflation will last for an extended period.

Natural Gas for November deliver IG

Above: Natural Gas for November delivery, source: IG.

According to CBA, the risk of outages at Europe’s nuclear plants has also increased gas demand for power generation, which came amidst a lull in wind generation.

The International Energy Agency (IEA) last week called on Russia to increase its natural gas exports to Europe in order to help alleviate a rapidly rising fuel prices and low levels of gas stocks for the coming cold-weather season.

The IEA noted Russia is supplying less gas than before the COVID‑19 pandemic.

"That may reflect gas shortage concerns in Russia, where it has been reported that additional Russian gas output is being directed to refill depleted storage," says Dhar.

Rising energy prices will add to inflation that is already expected by the Bank of England to peak at 4.0% later this year, although the Bank has now suggested these already lofty levels look too low.

"Ongoing energy price shocks risk keeping inflation above the BOE 2% target rate for longer," says George Buckley, an economist at Nomura.

"A theme seems to be developing here, and we think the risk is that the Bank of England may begin to see recent trends in energy and global costs as compromising medium-term price stability," he adds.

Oil prices are rising too with Brent crude just a few cents away from the $80/barrel level, its highest since October 2018, having risen for six days in succession.

U.S. crude oil was trading at $76.22/barrel.

"A persistent supply deficit is leading to an ever tighter oil market, with OECD inventories likely to end the year at the lowest level of demand cover in decades," says Amarpreet Singh at Barclays.

Brent crude prices daily spot

Above: Brent crude spot. Source: IG.

Barclays says it remains constructive on oil prices and raise their 2022 price forecasts by $9/b.

"Supply has continued to lag the demand recovery this cycle, and we expect the deficit to persist through Q1 22," says Singh.

OECD total oil stocks on a days of total demand basis stood at 46.3 in the second quarter of 2021, compared with 57.5 in the second quarter of 2020, according to Barclays estimates.

They say stocks are likely to end the year at the lowest level in decades.

Nomura's Buckley says rising petrol prices in the UK could add another 0.2pp to headline inflation by year-end, taking it even further above their peak forecast of 4.6% around November.