“When sorrows come, they come not single spies, but in battalions.” So said Claudius in Act 4 of Hamlet and Rishi Sunak and Jeremy Hunt must feel the same as they approach the climax of their own Shakespearean tragedy. Having spent the summer thinking they had overcome the worst of the UK’s financial travails, they find themselves, largely through no fault of their own, warning the public, as Hunt did last week, that: “The fiscal position has worsened since the spring and I will have to take difficult decisions in the autumn statement.”
There are many factors playing into Hunt’s difficult decisions but one of them is a head of the fiscal hydra that he may have thought had been severed: the natural gas price. Today the gas price sits at 134p/therm which is the highest price since March this year. In some ways, this is no surprise: we’re going into autumn and the cold weather has begun to kick in after weeks of mild temperatures. It was a stony-hearted Giga Watt who refused the entreaties of his freezing kiddies to turn the central heating on this weekend.
However, it’s also the case that the gas price never quite hit the lows this spring and summer that many market watchers expected. A brief dip below 60p/therm – close to the long-term, pre-Ukraine war average price – in June didn’t hold with prices hovering around 80-90p/therm through the rest of the summer. This reflected European nations making sure that their storage facilities were full, thereby avoiding the sky-high prices of August 2022, and also the reality that global natural gas markets are both tight and fragile.
That fragility has been underscored by two recent events: first, the apparently nefarious severing, presumably by Russia, of a natural gas pipeline between Finland and Estonia and second, Hamas’s terrorist attack on Israel and Israel’s response in Gaza. It’s not well known but Israel has become a natural gas powerhouse in the Eastern Mediterranean over the past decade with more than enough natural gas both for its own needs and to export within the region so any potential pressure on its ability to produce – and their offshore infrastructure would make for the juiciest possible target – would naturally affect the global natural gas market. Separately, Russia retains the ability to cut off the last of its gas supplies to Europe and its ruthlessness in targeting the potential weaknesses of its opponents even if it damages itself is well-known. How have we forgotten so quickly that the Russians blew up the Kakhovka dam in southern Ukraine? Are they capable of blowing a Baltic gas pipeline? Of course they are.
It should come as no surprise then that natural gas futures show us that traders are currently paying roughly 20% above current prices for gas to be delivered over the winter. Again, compared to more recent times, future prices of 150p/therm are nothing to be particularly concerned about: Hunt’s Energy Price Guarantee would just about kick in at these prices (noting, by the way, that the current Ofgem price cap, which is valid until 1 January 2024, sits at under two-thirds of the Energy Price Guarantee of £3,000 per average household) but compared to the long-term average, 150p/therm is about three times more than we are used to paying for and it’s fast becoming the norm. This is because the fragility of the market sits alongside greater competition too: while central banks in the US and Europe are trying to slow down their economies to reduce inflation, the Chinese economy is still growing at a decent clip, albeit slightly below expectations on the most recent readings, and will likely grow less quickly in 2024. The same can be expected of the Indian economy but it’s slower growth in both countries at a rate that far exceeds the sclerotic growth that we see in Western economies. It shouldn’t need to be said but growth of 4.3% in China and 6.3% in India next year means greater global demand for natural gas and that means higher prices as production tries to keep up.
Maybe, somehow we didn’t know this two years ago but the Russian invasion of Ukraine made it abundantly clear that natural gas is a lynchpin of the global economy. It’s the fuel that we can’t do without and won’t be able to do without for some time. Since 1998, natural gas production globally has close to doubled with drops in 2020 (due to Covid) and 2022 (due to decreased Russian production) the result of wider geo-politics. Aside from those two blips, the trend is stark – we need gas and we need more of it. No wonder then that new gas fields are coming on stream all the time – in Mozambique, Guyana, Norway, Cote d’Ivoire – but no wonder too that the price is grinding higher. The problem for Jeremy Hunt, as he grapples with his difficult decisions, is that when it comes to global gas markets, he may recall the words from a different Claudius who said: “No one is more miserable than the person who wills everything and can do nothing.”
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