Cost Of Heating. Pound Sterling Currency Symbol Next To A Radiat

Why Gas Prices Should Stay Much Lower This Winter

Now the end-of-summer heatwave is over and the temperatures and leaf colours start to match the rapidly shortening daylight hours, demand for gas is sure to rise. More hot meals, more domestic fires and more gas burned in power stations to produce electricity will be needed – and that is just for the domestic market.

With commercial gas users also peering at the prospects for the next few months, it would be little surprise if some were to be concerned that the winter ahead might be very costly.

A diminishing Russian threat

Undoubtedly, Vladimir Putin would want this to be an expensive winter for the rest of Europe, something that would diminish the resolve of Western nations to continue supporting Ukraine. But this would have been the hope last year too, when there was far less time to prepare for a situation in which Russian gas supplies were used so much less.

For the UK, the situation was always different from some countries, most notably Germany, which had a very high reliance on gas. Britain imported very little, so from a supply perspective the UK’s own supplies (making up about half the country’s needs) could be supplemented by Norwegian gas via the Langeled pipeline and LNG, chiefly from Qatar.

While alternative supplies could be found to Russian gas, the fact they were in such demand led to the huge surge in wholesale prices that fed into both energy prices and general inflation, not least because commercial gas users faced higher costs and passed them onto consumers.

How inflation deflates gas demand

Now the market has adjusted, the situation has changed somewhat. Moreover, a consequence of that high inflation has been an economic slowdown in many countries. While Britain has not endured the long but shallow recession once predicted by the Bank of England, Germany is now doing so. That means less demand for gas.

Indeed, as FX Street noted, a brief rally in gas prices has been curbed by the European Central Bank downgrading its Eurozone growth forecast for the rest of 2023 and 2024, as has Germany. This will mean lower demand than in 2022.

This combination of lower demand and higher supply is clearly good news. To add to this, meteorological autumn (defined by the Met Office as beginning at the start of September) has been very warm, pushing back the date when most of Europe will be turning on the heating. It all means European stocks of gas will be high ahead of the winter.

Not surprisingly, this has had a major downward effect on prices. Some suppliers have cut more than others, with the Irish Times noting that nobody has done so as much as Flogas, which has cut its gas and electricity prices to the consumer market by 30 per cent.

Flogas general manager Sean O’Loughlin said: “While wholesale energy markets remain unpredictable, we have seen a calming of volatility of late and this allows us to make these reductions.”

A ‘Rough’ improvement in UK security

While Flogas is serving the Irish market, its move echoes what is happening with gas prices in general just now. A more specific British consideration is the fact that the abundance of gas in Europe can be stored more effectively.

Last autumn, the government permitted Centrica to reopen the Rough Storage facility, which it has mothballed in 2017. The 30 billion cubic ft of gas it was able to store in the winter of 2022-23 immediately increased the UK’s gas storage capacity by 50 per cent, but this was with it only being filled to 20 per cent of capacity.

With more time to be prepared this year, it can be it will be possible to use up far more capacity, making a shortfall in supply even less likely.

All this leaves the situation looking good for now. The question is whether firms may face any unexpected and unpleasant surprises.

A possible concern would arise if there was a supply issue elsewhere. One potential concern with this recently arose with an industrial dispute in Australia. Workers at two Chevron LNG plants in Western Australia have embarked on a rolling programme of strikes, disrupting production at two sites that collectively account for five per cent of global supply.

This could have some impact if supply gets tight elsewhere, should the dispute roll on deep into the northern hemisphere winter, but as Reuters noted, it is not as significant as it might have been; while Australia was until recently the world’s leading LNG producer, it has now been overtaken by both the US and Qatar (the latter being Britain’s biggest LNG supplier).

A warm winter ahead?

Another possible factor could be a harsh winter in the north. As the Al Nino weather pattern took hold this year, the planet saw its highest ever recorded average temperature and southern Europe was scorched and often burned. But it was also the case that much of the southern hemisphere, especially South America, had an unusually warm winter.

Leaving aside the question of whether this is a permanent symptom of climate change, if prevailing conditions continue, it may be that the northern hemisphere will have a very mild winter, again keeping gas demand low.

Of course, it could simply be that erratic weather will be the order of the day and Europe has an unusually cold winter to counterbalance the hot summer. That would be a genuine game changer in terms of gas demand, as well as keeping engineers busy making sure pipelines are in good shape.

If concerns about climate change can be unnerving (although as one of the cleaner hydrocarbons, gas will be the last to get replaced), the longer-term prospects of being able to obtain enough gas seem sound enough, at least for countries like the UK that increasingly rely on Norway.

The country’s climate minister Espen Barth Eide told a Reuters Newsmaker event the country will go on being a big supplier to Europe even as it seeks to slash its own carbon emissions.

With so many factors loaded in its favour, western Europe could be in for a very comfortable winter gas-wise, both in terms of supply and prices.

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