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UK Natural Gas Prices Hit New High, Trigger "Marketwide Crisis"

Tyler Durden's Photo
by Tyler Durden
Wednesday, Dec 22, 2021 - 04:20 PM

Update (1120ET): The latest jump in U.K. natural gas prices has been called a "national crisis" by multiple energy firms and industry groups in the country. They're requesting the government protect customers and suppliers as critical Russian gas flows into Europe plunge, nuclear outages in France, and cold weather send gas prices to stratospheric levels. 

On Tuesday, U.K. wholesale natural gas prices hit a new record high of 470p per therm (intraday). Prices have since eased to 451p per therm. 

FT spoke with London-listed Good Energy, EDF Energy, and the trade body Energy U.K. about the alarming situation in the country as the winter in the Northern Hemisphere begins. 

"This is a national crisis. Wholesale gas and power prices have increased to unprecedented levels over the last three weeks, creating an extremely difficult operating environment for every business in the industry," said Nigel Pocklington, CEO of Good Energy, a small renewable energy supplier. 

EDF Energy, the fourth-largest supplier in Britain, said high natgas prices are sending power prices skyrocketing, and it's "critical" for the government to "act now to support energy customers."

Emma Pinchbeck, chief executive of Energy U.K., said Britain faces "a marketwide crisis."

"Other Treasuries in Europe have already responded to the crisis, but in the U.K., the energy sector is still asking if the chancellor knows that energy bills going up by over 50 percent in the new year is a problem for ordinary people, businesses, and the economy," Pinchbeck added.

U.K. lawmakers are in panic mode to protect households by possibly capping power bills. The same is true for other politicians across Europe. 

Where there is a crisis, there is always a huge opportunity. We explained yesterday, in a note titled "Commodity Traders Find Huge Arbitrage Opportunity As LNG Ships Head For Europe," that extraordinary high European premium on gas has made it an arb trade of a lifetime.

The spread between European and U.S. natgas prices is well above its 15-year range. Commodity traders with uncommitted LNG cargo from the U.S. Atlantic basin headed to Asia via LNG carriers are changing their routes to supply Europe because of this premium.

Europe's energy crisis and need for natgas could put a bid in US natgas. Just wait until colder weather arrives in the US, then Henry Hub-linked gas will fly. 

* * * 

European natural gas prices surged to new record highs this week as Goldman Sachs commodity analyst Samantha Dart explained the rally had been driven by declining flows from a critical Russian pipeline, nuclear outages in France, and cold weather across the continent. 

On Tuesday, Dutch front-month futures gained 20% to close at 182 euros per megawatt-hour. On Wednesday, prices were slightly off the all-time high, trading around 178 euros. 

On Wednesday, these parabolic moves to the upside prompted Italian Premier Mario Draghi to tell reporters at a year-end press conference in Rome that urgent policy action is needed to rein in Europe's energy-price crunch. 

"The increase in energy prices requires urgent action, we can't wait.

"The EU Commission is working but we need to work at national level as well and support for families and businesses for gas price hikes will be there if necessary, as it seems, beyond what has already been decided.

"There are big producers and sellers of energy that are having fantastic profits. They will need to participate to support the economy, they too need to help families," Draghi said. 

After months of dwindling Russian gas supply into Europe, Goldman's Dart told clients this week that volatile gas prices are primarily due to the Yamal-Europe pipeline, one of the major three routes that Russia's Gazprom supplies gas to north-west Europe, dropped to zero "for the past four days." 

The latest rise in energy costs are rolling onto households and businesses across the continent adds to inflationary pressures. Draghi is eager to introduce support packages for "families and businesses" because if governments can't resolve the energy crisis, a wave of discontent might follow. 

We explained on Tuesday that Europe's energy crisis is worsening, and power prices are smashing records. It's only a matter of time before politicians enact support packages to partially or fully shield consumers from dramatic energy inflation. The reason behind such a move is politicians want to get re-elected. 

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