Analysing The Political Economy

What Crisis? Wholesale Gas Prices Now Lowest In 18 Months

Economic Times Editor: I just wanted to share some information with you that you might not have seen. The article below is made up of a series of tweets by Ed Conway, the economics editor of Sky News. It tells the numbers story of the real price of natural gas, not the price that is very heavily contributing to the cost of living crisis. It begs the question – who is profiting from our current national misery and why is the government doing something about it. If you’ve not seen this information before today, you may well end up wondering what type of world we live in.


Ed Conway: Something seriously odd is afoot in natural gas markets. There’s a BIG glut of gas in the UK. Wholesale gas prices are the lowest in 18 months. There is so much gas no one is quite sure what to do with it. Yet far from falling, household gas bills are heading even higher.

The notion that even as Britons face the biggest cost of living crunch in generations, caused in large part by crazily high natural gas prices, natural gas prices themselves are now down close to what might be considered “normal” levels is somewhat mind-blowing, right?

Everyone knows we need to reduce the amount of gas from Russia to continental Europe (especially Germany). Some of that can be replaced with gas via pipelines from North Africa and Azerbaijan, but not enough. We’ll need a lot more Liquefied Natural Gas, the stuff that arrives in containers.

But here’s the thing. While Europe has a fair few LNG terminals they aren’t really in the right places. There are lots in the Iberian peninsula but there isn’t enough pipeline capacity to get much of that gas up to Germany. In Northern Europe, there are scant terminals.

That brings us to the UK with its three terminals and decent spare capacity (up until recently). As I wrote shortly before the invasion, it was plausible the UK could end up playing a role as a kind of land bridge, taking LNG off ships and transiting it to the continent.

The UK has more LNG capacity than Dunkerque/Zeebrugge/Rotterdam combined. It also has plenty of pipeline capacity to send gas to Europe, from Bacton to Belgium/Netherlands. Those pipes are usually used to send gas to the UK in winter (and back the other way in summer).

But this winter the UK could plausibly feed its own network with LNG, probably mostly from the US, and allow its North Sea gas to go straight to the continent. Actually, to some extent, this has already been happening in recent weeks – with the result that Britain, helped out by the US, could come to Europe’s rescue in the event of a catastrophic cut-off of Russian gas, providing enough extra gas to prevent the lights going out and homes going cold.

And here’s the kicker… none of this would necessitate political agreement or grandstanding. It’s simply the way the European gas market functions. Despite leaving the common market, the UK remains plugged into an even more frictionless energy market, where prices determine where gas flows.

Indeed, understanding that the UK is plugged into this market sheds a somewhat different light on the discussions about whether we need more gas storage. For in practice we already have a massive storage facility in Europe. We send gas there in summer and (usually) withdraw it in winter.

We’ve established that overnight wholesale gas prices are at the lowest level in 18 months. Electricity prices are also unusually low. So when will we see this reflected in our bills? Is the cost of living crisis over? Sorry, you’re not going to like the next bit.

The short answer is that energy companies say they set their prices based NOT on the day ahead prices but on prices months or years ahead. And guess what – those prices are still eye-wateringly high, similar to those in mainland Europe.

In fact, it’s more perverse still. In recent weeks, even as the day-ahead price dropped, the FUTURES curve actually rose slightly so the running tally for where the price cap is likely to end up in Oct actually went UP even as day-ahead prices collapsed. You couldn’t make it up.

This anomaly may not last long. That’s what investors are betting. Prices versus volatility; day-ahead gas jumped from 40p to 100p a therm in only a few days. Even so. Incredibly surreal that even as everyone talks about gas shortages we are in the midst of the biggest glut in a long time.

The UK is drowning in gas – but consumers will get little or no relief from the very low prices of wholesale gas prices.




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