Lex: UK gas

Listen to this article


The cycle of tight supply followed by eventual gluts is a familiar one to commodity investors. The UK gas market is no different. Wholesale winter gas prices reached a record-high of 43.5p a therm last week, as traders fret that the UK’s gas import infrastructure may be insufficient to cope with a severe winter. It is probably of little comfort to those needing to buy gas in the spot market that the UK will be oversupplied by about 2007.

The UK is moving toward becoming a net importer of gas. The completion of several large import infrastructure projects for both pipeline gas and LNG in 2006 and 2007 will ensure security of supply. The transition, however, is not proving smooth.

North Sea gas provided the UK with flexible supply to meet peak swings in demand. Depletion of these fields has left the UK dependent on imported continental gas, which is linked to the price of oil. UK gas prices over the last year have moved from a discount to the continent to a premium, but strength in crude prices has added a further twist to the structural story. The start of emissions trading next year is also expected to bolster demand for gas for electricity generation at the expense of coal - a trend already supported by the sharp rise in the price of coal.

The gas market is expected to be tight this winter and next. Fears of outright lack of supply are based on an exceptionally harsh winter and are probably overdone, but have provided a focus for speculative trading activity. Weaker crude and a mild winter would take some of the heat out of spot wholesale gas prices. Ofgem, the industry regulator is also looking at the recent surge in prices. But, with new supply still some way off, the odds favour continuing volatility, with other suppliers likely to follow the lead of British Gas and raise household prices.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.