Last week, the wholesale price of gas in the UK rose to 46.65p a therm, the highest it has been in over a year. Changes in the price of gas can be attributed to a number of issues within the energy industry, as well as several external factors.
Here, we take a closer look at the short and long-term factors which influence the price of gas in the UK.
We’ve highlighted some of the factors that affect the short-term price of gas below:
A week ago news broke that Centrica had been forced to shut down one of its key gas storage facilities until spring 2017 — prompting a spike in the price of gas due to additional demand on the network, particularly over the upcoming winter months.
Centrica’s Rough site, which accounts for more than 70% of the UK’s total gas storage capacity, has experienced a number of issues in recent years, and has undergone a series of comprehensive tests throughout 2015/16. These safety tests revealed a number of problems with the facility’s gas wells, and the site has since been closed for further testing and maintenance works.
Wholesale gas prices for winter 2016/17 soared by over 10% when the news broke on Friday 15 July, as traders reacted to the anticipated surge in demand for winter delivery gas. According to a spokesperson for Centrica, efforts are being made to partially reopen the facility by November, but only at around a third of its normal operating capacity.
Warm temperatures aren’t just good news for holidaymakers, but also for business gas buyers, as a reduction in demand for gas can cause the price of gas to decrease. Likewise, if the temperature is expected to drop the price of gas is likely to increase - as demand will go up, as the need for heating rises.
And temperature isn’t the only environmental issue that can affect gas prices; the UK’s growing reliance on electricity-generating wind turbines means a period of windy weather could upset the price of gas. Combined cycle gas turbines are used to produce electricity, therefore periods with prolonged solar and wind generation can reduce gas prices, as there is less demand for gas to be used to create electricity.
Gas is bought, sold and transported in vast quantities, and how much is readily available can impact the wholesale gas price. When supply into the UK outweighs demand, the wholesale gas price comes under pressure and prices can ease, making it cheaper for business gas buyers.
The UK is reliant upon importing and exporting gas to the European continent through pipelines, and the rate of which gas enters the UK can vary by the hour. The rate at which gas flows into the UK system can impact the supply and demand fundamentals in the market. Higher flows and a ‘long system’, where supply outweighs demand, can push wholesale prices downwards. When the supply and availability of gas is limited, this pushes the price up and encourages further production and imports.
Gas flow through pipelines can be interrupted by maintenance and other faults, which can often result in restricted flows, and in some cases, last for long periods of time. The biggest impact on the wholesale gas price comes from unplanned maintenance periods, as there is no time for preparation, leaving some markets short on available gas. A recent example of this has been seen in Norway, where outages at the Nyhamma gas field have resulted in increased wholesale gas prices in the UK.
Given that the flow of natural gas is largely based on supply and demand, this causes short-term fluctuation in the wholesale price of gas.
Liquefied Natural Gas (LNG) can drive short-term wholesale gas prices, because the sheer volume that can be delivered by the vessels can lead to a glut of supply in the region. Gas is condensed to 1/600th of its size meaning that rather than being confined to pipelines, LNG exporters can ship large volumes of gas around the world relatively quickly, in some cases targeting the most beneficial market conditions. A large LNG cargo arriving into the UK is likely to send short-term wholesale gas prices down due to an oversupply of the commodity.
While the above factors impact gas prices in the short-term, there are a range of long-term issues which can affect the price of natural gas in the future. We look at some of these below.
Following the Brexit result on 24 June, the value of pound sterling fell sharply against the euro. Currency movement can have a knock-on effect across several markets, and this can drive the price of gas.
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If there is strength in the sterling against the euro, prices usually weaken in the UK market as traders look to buy the relatively cheaper gas from the European markets. This lessens the demand coming into the UK. If the opposite occurs, as was the case following the UK referendum result, and sterling weakens, the UK market prices tend to increase as European traders can purchase more UK gas for their money. The demand and buying activity pushes the UK market prices upwards.
The price of crude oil is linked to long-term variations in the cost of gas, with swings in the price of oil affecting wholesale gas prices on further-dated contracts, usually into the next calendar year. At the beginning of 2016, crude oil was priced at around $28 a barrel but has since climbed to an average of $45 to $50 a barrel. Crude oil prices have increased throughout 2016, as some oil producing countries look to reduce supply of the commodity to increase the value in the product. This has been pushed back so far, but speculation persists. This jump is likely to have an impact on the wholesale price of natural gas, with experts predicting that gas prices will increase in 2017/18 due to the rising cost of oil.
Over the course of 2016, the UK will lose around 8.4GW of its overall generating capacity through the closure of several coal power stations, which were traditionally relied on to supply homes and businesses with electricity. While this news has delighted environmentalists, some in the energy sector worry that the closure of coal power stations will leave a gaping hole in the UK’s energy network.
In the wake of the proposed coal plant closures, natural gas is one of the front-runners expected to replace coal in the production of electricity. This could ultimately lead to an increase in gas prices, due to greater demand on the network.
Legislation is one of the biggest influencers in the long-term gas price, with supply often limited or restricted following the passing of new regulations, which often concern the environment.
A good example of this is the Dutch government’s decision to cut production from the Groningen gas field — Europe’s largest natural gas field — from 33 billion cubic metres to 24 bcm. This decision was brought forward by the State Supervision of Mines to cut the number of induced earthquakes which occur in Groningen, and is likely to lead to a decreased supply into the European region from the Netherlands over the next year. Wholesale gas prices could increase following this news as supply outlook weakens.
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