1. What has happened to gas prices?
Since September 2020 the Within Day gas price has increased by 371%. The average Within Day Price in September 2020 was 30.85 p/therm, in September 2021 it is 145.23p/therm.
This has happened incrementally over the last 12 months.
2. Why have gas prices increased so much?
Gas prices have been impacted by several factors;
A cold Q2 in Europe left storage facilities well below normal levels
Over the summer months indigenous gas produced in Europe is usually used to replenish storage facilities while LNG shipped from other countries is used to balance the system for shorter term demand. Economic recovery in Asia and failing Hydropower in South America increased the LNG price in these markets meaning global LNG cargoes have been directed there instead of coming to Europe.
Low storage levels and a lack of LNG have made the market nervous regarding the supply levels over the coming Winter, this has pushed prices up. The market is comfortable when storage levels are at least 85% full entering the winter season (October – March). European storage is currently 70% full.
High levels of maintenance
The wider European gas network has experienced high levels of maintenance, both planned and unplanned over the summer months. This reduces the amount of excess gas available while maintenance is being carried out.
Low wind levels
Low wind levels in recent months have increased the gas for power demand
There has been much focus on the development of a new gas pipeline, Nordstream 2, from Russia to Germany. Completion and successful certification of this pipeline will increase the flow of gas into Europe, however there is uncertainty as to when the pipeline will become operational and this risk has also been priced into the market. Russia can flow gas into Europe through a number of other operational pipelines, however, has only booked the minimal amount of capacity required to flow through these pipelines. It is thought this action is sending a strong political message to Europe to ensure Nordstream 2 is commissioned to flow gas as soon as possible.
Current unprecedented high gas prices are a direct result of high global demand and a market nervous that a cold winter will mean high European demand and the need to compete with other markets for LNG to balance the system.
3. How does the current gas market impact firmus energy supply compared to energy suppliers in GB?
Firmus energy employs a gas hedging strategy whereby gas is purchased incrementally as much as 12 months ahead of month of delivery. This means a large percentage of the gas required for Winter has already been purchased. This puts firmus energy in a much better position than many GB suppliers who rely on buying gas on the ‘prompt’, i.e. within day. The prompt price is much more volatile and open to market forces than a forward hedged price.
The GB domestic gas market is capped, meaning suppliers have a limit placed on how much they can charge customers. When the price they are required to pay for gas on the prompt is significantly higher than what they can charge customers it causes cashflow problems and impacts their ability to actually pay for and deliver the gas. Firmus energy is not as exposed to this issue due to our hedging strategy and tariff review mechanism.
4. Will gas stop flowing?
No. There is no shortage of gas in the market at this time. Current high gas prices are reflective of concerns over low storage levels and a cold winter and high LNG prices globally.
5. What is the outlook for the future?
Not even ‘Mystic Meg’ could accurately predict the future of global gas commodity markets and the suite of supply and demand dynamics. There are a number of factors that could help ease high gas prices. Positive news about Nordstream 2 becoming operational will help soften prices. Typically, the winter season brings windier weather which will decrease gas for power demand and a mild winter in Europe will moderate gas for heating demand. High levels of maintenance in the European gas network over summer months will come to an end, increasing supply. A mild winter in Asia has the potential to reduce the demand for LNG in that market which would help increase supplies to Europe.