Gas markets are still very jittery
Of the many things that might keep Rishi Sunak awake at night he will not, in recent months, have had his slumber disturbed by the price of natural gas. The highs of last autumn are long gone and just two weeks ago, the UK gas price was at a 2 year low at 55p/therm. Today, however, that price has doubled to 110p/therm: not disastrous by any means but it is a trend that Sunak will want to see reversed as soon as possible.
So what’s happened? As so often it’s short-term factors coming together to create a pinch:
The current blast of hot weather has increased energy demand beyond what we might usually expect at this time of year.
The sun is shining but the wind isn’t blowing which is keeping the contribution of solar and wind energy in the UK at around 35%. This is line with the annual average but, at this time of year, we’d expect it be closer to 50%.
Scheduled outages at key Norwegian gas fields have been extended by the network operator Gassco from this month into mid-July.
Some traders, who had been shorting the gas price, have been squeezed and have had to unwind their positions.
All of these factors will fall away over the next few days and weeks so we can expect to see the price revert back to its previously low levels. Indeed, at the time of writing, the gas price is 102p/therm having risen as high as 125p/therm earlier today and the forecast for my cricket match on Sunday near Newbury suggests blustery rain and 21 degrees.
One factor that is very much not to blame is coal-fired power stations warming up and solar panels being switched off “because the sun is too strong” as more than one broadsheet columnist and several MPs claimed this week. You can see that myth being debunked by the BBC here. If you don’t trust the BBC, the facts are very simple: this Thursday lunchtime solar is providing 9.27 GWs of power, meeting 30% of current demand in the UK. Coal-fired power stations are producing no power at the moment and have produced 0.2% of all the electricity consumed in the UK over the past week. Still, never the let the facts get in the way of a good story, right?
As ever, there are lessons for European governments, including our own, in this. The gas market is still very jittery and who can be surprised? Gas supply remains very tight as the Norwegian outages have shown us and demand for gas across Europe remains as strong as ever in a highly competitive global market. Accordingly the ingredients are there for future spikes this summer. More importantly, the ingredients are also there for the price to rise into winter as Goldman Sachs warned us earlier this year. In some ways, this is good news: demand for gas is being driven by economic growth and not by European governments panic-buying as they did last September. However, if you’re a government that’s promised to halve punitive inflation by year end, a rising gas price is an ill wind indeed. Perhaps Rishi’s sleep risks being disturbed after all.
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