As of July 2021, all tracked gas contracts rose by significant margins, with the most pronounced increase in near-term contracts. During summer 2021, wholesale gas prices have remained comfortably above last year’s levels, supported by high commodity markets and tight supply-demand fundamentals. Overall, summer gas prices saw bullish momentum that is usually only expected in winter months.
Mid August saw the price point for day-ahead gas contracts reach 117.4p/th, the highest price seen since the ‘Beast from the East’ weather event of March 2018. This unprecedented increase set August wholesale prices up 134% from the 5-year rolling average. The Figure below shows the magnitude of this recent increase compared to levels from the same period last year.
Historically, the main driver behind increases of this extent is low gas inventories across Great Britain and Europe. Figures from Gas Infrastructure Europe do show that in fact, gas storage levels are around 15% lower than the 10-year rolling average for this period.
Further to this, efforts to restore stocks have been curbed by several factors. Principally, a strong recovery in gas demand following a lifting of COVID restrictions and a return of greater economical activity. Weak wind levels through the UK have also given rise to a greater demand for gas-for-power generation which, coupled with weaker pipeline flows from North Sea gas fields due to outages and maintenance, have led to an increase in commodity costs that will ultimately feed through to gas and power contracts.
Despite high gas prices, the UK has failed to attract sufficient LNG shipments. This is due to a backdrop of rising international carbon and LNG markets. In particular, it has been a very prosperous month for Asian LNG markets with Asian LNG hitting a 6-month high on the backend of July, supported by strong summer electricity demand in Asia and North-West Europe.
Looking ahead, it is likely that gas and power prices will remain high especially with the real risk of Europe entering winter with low gas storage levels.
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