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UK wholesale gas prices have surged to their highest level in two years, posing fresh headwinds to the economy.
Wholesale gas prices rose to £126.190 per therm on January 02, the highest level recorded since January 2023.
Gas prices rose steadily through 2024, with a recent spike following a relatively cold start to winter in Europe, prompting a drawdown on gas reserves.
More recently, Ukraine stopped transferring Russian gas to Eastern Europe after letting the existing deal expire on January 1.
Above: UK prices for the February delivery contract.
“By dashing any hopes that a last-ditch solution could be found to keep gas flowing through the pipeline, the news pushed the benchmark EU TTF natural gas price through the €50 per MWh mark in recent days for the first time since October 2023,” says David Oxley, Chief Climate and Commodities Economist at Capital Economics.
Analysts at CIBC (TSX:) Capital Markets point to the rise in gas prices as being a potential reason for weakness in the Euro and Pound against the Dollar.
“Despite gas prices easing from early session highs this has failed to preclude from trading below 2024 lows,” says CIBC analyst Noah Buffam.
He confirms the price spike is a function of cold winter temperatures alongside the ending of a supply deal between Russia and Ukraine; the latter has resulted in a cessation of supplies.
Nevertheless, shutting down the flow of Russian gas was something Ukraine had clearly signposted.
“Given that President Zelensky was steadfast that Ukraine would not renew the gas transit deal with Russia when it expired on 31st December, the news that the transit of natural gas transit ceased on 1st January did not come as a shock,” says Oxley.
The rising prices represent a potential new headwind to the UK economy, with businesses already facing higher taxes and a rise in the minimum wage.
The EU and UK are now left exposed to global Liquified Natural Gas (LNG) market dynamics and will have to compete with Asia for supplies.
Capital Economics says this will keep energy prices elevated.
“Although we expect EU natural gas prices to fall substantially as and when conditions in the global LNG market loosen, anticipated increases in LNG supply have been beset by delays in recent years,” says Oxley.
UK energy bills are about 50% higher than pre-Covid levels, and analysts predict they will rise by a further 3% in April.
Following wholesale gas market developments, a new forecast from Cornwall Insight finds the price cap will rise to £1,785 a year for a typical consumer in April.
Compared to the three months from July, it will cost £217 a year more, according to the forecast.
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