Investment Banks Project Spike in UK Gas and Power Prices Ahead of Upcoming Winter

There is a consensus among market participants that UK gas and power prices have reached a price floor. The central conversation amongst many business stakeholders right now is whether gas and power prices have reached bottom of the chart and whether the structural shift in the market talked about last year will remain going forward. Business owners and key decision makers are currently assessing whether to fix out their Winter 23 start dates now, or to continue waiting into the summer, hoping for a further 10-15% reduction.

UK gas and power prices from an economic and marginal cost point of view have now reached their floor, however the flow of LNG to the UK/European market due to weak gas demand and prices in Asia continues to challenge this level. Despite the most recent price decline, the reality is, during the winter the UK and Europe will face energy shortages, and the decision to not buy any energy during the lower and less volatile pricing periods could be detrimental to the businesses capability to operate and profitability.

More recently, the investment bank Goldman Sachs warned customers that European gas prices could treble this winter from current level. Is the analysis issued by Goldman Sachs valid, given current market fundamentals? The view of the NGP trading team is in accordance with Investment Banks and government think tanks, who believe prices going forward are expected to both rise and become more volatile.

“Winters will be volatile”

Ramnikh Kular, Senior Energy Trader at NGP said: “As it stands, there is significantly more upside price potential thandownside, if we look closely at the supply and demand fundamentals. The reality of it is, despite the recent downward trend, gas supply this winter remains an issue. Winter 23 will be no different than Winter 22 when you look at the fundamentals. We can expect to see the same volatility for winters going forward. We have no Russian gas and winters going forward will always be volatile. Why wait to pay 50p/kWh when prices are now in the 15p/kWh region?”

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The key driver behind this expected price increase will be higher demand, due to winter weather risk and declining attempts by household to limit usage, according to Goldman Sachs. This is expected to have a knock-on price effect on both the UK and Asian markets. Why are investment banks concerned about the upcoming winter? Can the UK and European market survive another winter with moderate prices?

According to the Northern Gas and Power Trading team, the key risk factors for this winter include:

  • Zero pipelined Russian gas into Europe: In absence of Russian pipelined gas, Europe and the UK will continue to rely on LNG imports, which are susceptible to price movements in Asian markets.

  • French nuclear production: EDF has confirmed its nuclear power production target for 2023. The annual production target of between 300 and 330TWh is historically lower, compared to previous years, where nuclearproduction exceeded 500TWh between 2010 and 2019.

  • High Asian demand for LNG: Chinese climate goals and easing of COVID-19 lockdown restriction will increase competition for LNG.

  • Winter weather risk: Winter 22 was a warm winter; the probability of having two warm winters in a row is low.Temperatures this upcoming winter will become a significant price driver.

  • Uptake in demand: Low prices will increase industrial demand and reduce demand destruction which has been evident in the UK market.

The risk factors highlighted will increase price volatility and create irrationality in both pricing and trading behaviour. When a supply shock impacts the market, traders panic to buy commodity. At that point, sellers increase their bid, creating an upward price trend even if a low amount of volume has traded at that level.

The equilibrium at this point, is not a market reflective price, but rather a level which has priced in the excessive risk premiums due to the supply shock.

In order, to avoid this risk premium price, Head of Energy Trading at NGP, Latif Faiyaz says: “The market has filtered out the majority of the risk premiums right now – at these levels businesses should be buying energy.”

Any questions?

At Northern Gas and Power our expertise and market intelligence achieve long-term stability for your energy costs, helping to secure the future for your business. We have helped thousands of businesses navigate the energy crisis, giving budget certainty and a plan to move forward.

Contact us today to review your current position.

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