Gas Price Surge… Was it justified?

Gas Price

Gas Price Surge… Was it justified?

By Robert Mckenzie,

MyUtilityGenius Energy Consultant

The start of this week saw a perfect storm of gas price drivers; triggering a surge in the gas price on both Monday and Tuesday this week. Prices reached levels not seen since 2013, but how did this happen?

On Monday news broke of the Forties pipeline in Aberdeenshire being closed for repairs after a crack was discovered in the pipeline. The Forties pipeline is responsible for delivering around 40% of the North Sea’s Oil and Gas production. The UK gas supply is reliant upon approximately 38% from North Sea supplies. Therefore the unexpected closure of the Forties pipeline caused a supply shock to UK gas which impacted prices on Monday. But can the UK get gas supply from elsewhere?

Following on from this, further news broke Tuesday morning of an explosion at Austria’s main gas pipeline hub, Baumgarten. The explosion tragically killed one person and injured many others. The gas hub chiefly supplies gas to Italy, but also supplies to Germany, Hungary, Slovenia and Croatia. The impact of this explosion was felt all across Europe; Italy went into a state of emergency as the gas price soared with an increase of 110% to record highs. The European gas network exists almost as a single entity, with gas slowing between European nations, particularly in mainland Europe. Therefore any shock to supply within that network would have the ripple effect of impacting prices all over Europe due to nations reacting to secure supply. So as this suggests, the UK also felt the impact of the Baumgarten explosion as gas price rocketed up to 95p/therm, that was up from the previous peak on Monday of 74p/therm on the Day Ahead market, both of those peaks are well above the Day Ahead market average for Q4-2017 of around 50p/therm.

Storage shortage, lack of energy security and the gas price

The reason why both of these events caused such impact on the UK gas price is due to gas supply certainty and flexibility to cope with supply shocks. In previous years, the Rough gas storage facility was fully operational. This accounted for 70% of UK gas storage and was able to supply 10% of the UK’s total winter demand in 2014. With a storage facility of that size it previously allowed the UK to store large amounts of gas so that in the event of supply shocks elsewhere the UK gas market would still be able to have certainty of supply and be flexible to cope with events elsewhere. Since the Rough facility is in the process of being decommissioned the UK is now far more susceptible to supply shocks and can no longer turn to gas storage… are the events this week set to be more common in the future?

If gas supply (or lack thereof) wasn’t enough to throw prices into turmoil… we can also add demand into this picture. The UK weather has very inconveniently decided that it will be this week that it decides to trial Arctic conditions up and down the country. Whilst this may look and feel a lot like Christmas to many people, in reality from a market perspective it means that we have seen large increases in demand for gas. Gas demand has a very strong correlation with weather due to gas being the main source of heating in the UK. This meant that at a time where supply was suffering, the UK (and to add even more pressure, Europe) was seeing a spike in the demand for gas as people tried to stay warm.

With the Baumgarten gas hub now fully operational again, the Forties pipeline set for repairs and the UK weather warming up (ever so slightly)… prices have begun to settle again today. But this week shows just how susceptible the UK gas price can be to both events at home and overseas. The price volatility seen this week could become a more frequent occurrence in the absence of certainty of gas supply to the UK during winter. Overall the surge in the price of gas was an inevitability in the current state of UK supply, and the market will always react dramatically to shocks to supply in the absence of certainty.

 

By Robert Mckenzie,

 

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