Last week, the UK witnessed high drama as gas prices shot through the roof with word getting out that the country might be facing a harsh winter due to gas shortage. Soon, Industry pandits were calling the situation akin to the oil crisis of 1973 and speculated if manufacturing will face the brunt of the shortage by getting closed down.
As the gas prices touched an all-time high of 400p per therm, Putin announced that Russia would boost gas supplies all over Europe via Gazprom. Within hours, the prices fell to more equitable terms.
While a national emergency was averted at the last moment, it would be interesting to explore and understand the factors that affect natural gas prices in the UK.
Sometimes, an impact on the gas prices is caused by just one of these factors, while other times, there is more than one factor at play. For instance, the shortage last week and the subsequent rise in prices had more than one cause.
Every year, the UK depletes its natural gas storage post winters so that it can pump natural gas to full capacity at seasonally low prices before the onset of winters. This strategy would have worked had the demand for natural gas not risen in Asia with Asian countries competing and outbidding the UK to snap up natural gas from the same set of suppliers. The UK also gets natural gas supply from the Netherlands.
However, the Netherlands too was running on low reserves as Russia was withholding gas supply to the rest of Europe. It is believed that Russia’s withholding of the gas supply was a ploy as it was awaiting approval for the controversial new Nord Stream 2 pipeline, which bypasses Ukraine to send gas to Germany. As you can see, there was more than one facet that had brought the UK to the brink of a big energy crisis.
- Seasonal Demand
During winters, the demand for natural gas goes up as the need for residential heating increases exponentially. As a result of the increase in demand, prices shoot up, making gas expensive during cold months.
On the other hand, the summer months witness a drop in demand as heating is not required. During this time, the gas prices drop as well. The UK takes advantage of low prices during summers to snap up gas shipments at cheap prices making heating costs economical for the general public.
Asia’s growing demand for LNG has had a significant impact on UK’s LNG imports. According to a report in Bloomberg, Asian imports rose 16% in July as compared to last year while exports to South and Central America nearly doubled. Countries like China, Japan and South Korea need the energy to cool their homes and official establishments. The huge demand for air-conditioning to combat hot months has these countries outbidding the UK and other European countries to secure reserves for summers. Even price-sensitive nations like India and Pakistan are not shying away from spending a lot more than they usually do. Adding to these woes was Hurricane Ida in the US which impacted gasoline availability and affected natural gas production causing natural gas prices to go up and its exports to fall.
- Natural Gas Storage
Storage facilities have a significant impact on natural gas prices. Higher inventory levels enable the supply to meet demand which in turn leads to a drop in gas prices. However, during winters, when the demand is higher than usual, the drop in inventory levels may lead to higher gas prices. In fact, where natural gas storage is concerned, the UK is shockingly far behind other European countries like Italy, Germany, France, and Netherlands (to name a few). Moreover, the difference between storage levels of Italy and the UK is baffling with Italy standing at 166.2 TWh and the UK 8.9 TWh.
It is also worth mentioning that the UK had emptied its small natural gas reserves to replenish them during summers but they were outbid by Asian countries.
- Alternative Energy
The UK is increasingly relying on renewable sources of energy to meet its pledge of achieving carbon zero emissions by 2050. While the wind energy activity on the North Sea has been promising, however, there is a catch. This year, wind energy has constituted 7% of the UK energy makeup while in 2020 it averaged 25%. Wind energy is right now an intermittent source of energy and when it fails to fulfill its energy quota, the pressure drives up prices of Natural gas.
Natural gas prices are also affected by politics and diplomatic relations between countries. Last week, Russia was withholding gas supplies which it normally releases in late summer, via Polish and Ukrainian pipelines. It was believed that gas supplies were withheld as Russia was awaiting approval on the new Nord Stream 2 pipeline. This move affected the UK because Russia supplies gas to UK’s supplier the Netherlands, which had natural gas reserves in lower capacities.