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Annual gas prices hit new records, now over 1,000% higher on last year’s level.
| 19th Aug, 2021 22nd Aug, 2022 |
Brent Spot S/bbl 71.50 97.50 |
Increase On Last August: 36% |
Gas p/th 55.75 97.50 |
Increase On Last August: 1138% |
Power £/MWh 71.50 640.00 |
Increase On Last August: 795% |
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Wholesale gas and power prices hit new record highs, shrugging off weaker crude prices which had fallen 20% over the past three past months.
In what is now become a very fast-moving picture, the ‘bell weather’ October Year Gas contract hit £7 a term in the late-morning session today. The power market also soared with annual base-load charging above £650/MWh. The OTC market remains gripped in a buying frenzy amid fears Russia could shut its Nordstream 1 pipeline indefinitely as well as an illiquid forward curve, weakening liquidity and lack of competition in the all-but-unregulated Over-The-Counter trading market. The OTC Forward and electronic Futures remain gripped by the increasingly unsettled picture in Ukraine and Russia over the last few days. Whether or not Russia does wilfully default on its long-term gas sales agreements (something that Gazprom has never done or been sued for to date) and halt winter supply to Europe remains to be seen, however.
Confusion reigns across the UK and European gas markets now amid the EU’s announcing a ‘total ban’ on Russian imports coupled with a ‘wholesale price cap’. Promoting (or certainly coinciding with) a Russian announcement that, for the first time, Gazprom will formally suspend gas supplies via Nordstream 1, the older and only recently operational pipeline of the two. Nordstream 1 and 2 together could theoretically export 110 bcm/y or triple the annual gas volume from the UK Continental Shelf for comparison.
Perhaps the first paradox relating to the EU’s concept is exactly how a ‘price cap’ can apply to Russian gas whose imports are precluded in the first place.
The second perhaps is the somewhat bizarre situation we have of Russia now sanctioning gas exports to Europe via Nordstream 1 and the EU already sanctioning gas imports through Nordstream 2 which was commission-ready just days before the invasion of Ukraine. USA/EU/UK post-invasion sanctions against Russia included a ban on Russian imports of crude and refined products, principally heating oil, diesel and middle distillates. Hardly surprising then to see a self-fulfilling prophecy unfold and Europe short of gas of liquids’ heating fuel.
Evidently, Russia has now played its ‘gas card’ even though it was wrongly stated in the press as having done so in the past, possibly breaking legal agreements for the first time. This has instigated what many in the trading arena perceive as panic (or certainly experimental!) EU measures to intervene directly in the wholesale gas market. Leaving the legal detail or European Treaties (the 1957 Rome Treaty explicitly prohibiting the ‘distortion of price levels’) to one side, four days on we’ve still seen no actual detail as to how wholesale ‘price fixing’ measures will work. The other news is that the UK is now proffering a similar ‘price fixing’ initiative of its own, just three days after the EU announcement.
It is possible that legal amongst many other practical difficulties involved have been pointed out to ministers. This Thursday, 8th September’s announcement in Westminster may well concentrate on ‘taxpayer subsidies to gas shippers and suppliers but include little further detail on the salient question of fixing OTC gas prices which, from a consumers’ standpoint, mightn’t be preferable anyway. Notwithstanding the mooted £150 billion cost of the overall programme, the final effect of establishing a ‘cap’ (at anywhere near current O.T.C. price levels) could be to ‘freeze’ wholesale prices to levels higher than they could have been otherwise, had the O.T.C. market been left to its own devices over the year ahead.
It is early days but there is silence on the same question from Brussels still. The whole idea of fixing OTC prices would yet be kicked into the long grass were Russia to ever resume limited supplies via Nordstream 1. That might look unlikely just now and some degree of UK-EU intervention will come sooner but the prospect of limited Russian gas supply remains plausible.
The Kremlin’s latest move is patently mischief-making even if it is possibly temporary; a timed and politically-divisive measure which is already paying a dividend. Because the “sanctions’ paradox” (that of the EU and Russia sanctioning each other whilst complaining about supply) has already been seized upon by Italian opposition parties amid soaring domestic bills and a general election in three weeks’ time on 25th September. Political splits pertaining to EU sanctions on Russian energy generally are also reported in Germany and other member states. Consequently, Russia looks unlikely to change its stance soon, preferring to watch events now set-in-motion to play out first. Meanwhile, taxpayers will have to brace for substantially higher government borrowing to pay for subsidies while energy merchants will have to look out for sudden changes in the way they conduct business on the OTC forward, derivatives and exchange-traded futures markets.
As of now (2 pm, 7th September) October Year gas is trading at 540 p/th circa and base-load electricity as just over £530/MWh.Down on my 22nd August News Flash (re-enclosed below) but substantially over the 70 p/th and £75/MWh levels (comparatively stable ones at that) at this stage last September.
The current price level is clearly worrying for I&C users recently contracting or soon having to contract a new annual gas or electricity supply before the new Gas Year on 1st October. So effectively forced into fix a new contract price for 12 months forthwith (as no UK supplier currently offer businesses a ‘variable tariff’ (akin to such deals on offer to household buyers) unless they purchase on Flexi contracts, though such deals can only apply to a minority of UK businesses).
A Downing Street announcement on its Energy Package is expected at circa 1 pm today, rumoured to include measures to dismantle existing long-term electricity agreements based on contracts-for-differences (CFD). The point Westminster is unlikely to mention – assuming it’s been thought through – is the immediate impact on OTC gas trading and – in particular – on the bilateral gas contracts market where long-term agreements include contract indexation to gas, power market indices or in most cases both. Potentially opening a Pandora’s Box in terms of disputes between importers, trading intermediaries and suppliers thereby undermining the long-term contracts signed between counterparties, including those whose own commercial activities aren’t even influencing the target wholesale gas or electricity prices in any meaningful way. Today’s announcement will have short-term implications on wholesale electricity prices, also forward gas prices, albeit to a lesser extent, as well as the structure of the bilateral OTC & exchange-traded markets and long-term contracts market. Heightening uncertainties and producing an unexpected supply pool of ‘winners and losers’ in the process; the final winners will not necessarily be the consumer in all cases, even though the Energy Package yet to be announced is targeted at helping them with costs. The October Year Gas and October Year Power markets softened by 14% and 15% respectively. Although much of this is attributable to a fall across the energy commodities complex amid a weakening crude oil, with Dated Brent heading south in recent days towards $80/bbl and a renewed French initiative to restart its out-of-commission reactors, potentially all 20 of those affected, in the months ahead.
