On the positive side of things, gas prices fell at the beginning of 2023. Wholesale gas prices were down to 178p/therm in January which is the lowest they have been since Russia's invasion of Ukraine.
Why have wholesale gas prices fell
Gas prices are a common source of stress across the world, so it’s fortuitous that the EU has been proactively stockpiling gas reserves and the temperatures have remained warm. The net result of these two factors is a decrease in gas prices, which is much-welcomed news. While there are many reasons why gas prices can rise and fall, having a comfortable cushion in storage and warmer weather than usual are great positive influences on prices.
This past January has been unusually warm compared to what we typically expect at the beginning of a new year. This means that wholesale energy prices were lower due to these unexpected temperatures. Both the UK and EU anticipated a cold snap which meant they expected demand to be much higher than it was. The unseasonable temperatures led to a 25% drop in the EU's gas consumption.
This unseasonable warmth has had an unexpected side-effect; gas storage energy supplies are surging far beyond what was expected even before the season began. This extra reserve could make it possible for Europe to have ample energy right through the spring months and into the summer season. It's almost certain that by March a large amount of this stored supply will remain in their tanks, with forecasts indicating an estimated 50%. That is a considerable 20% higher than pre-winter estimations projected. This bountiful resource should provide an invaluable buffer for Europe's mid-term needs, no matter how the weather turns out in the coming months.
Why is the energy market likely to rise again this year?
As the new year begins, we've seen a promising decrease in wholesale gas prices. However, this could be short-lived as it has been predicted that the volatility of the market is set to increase throughout 2023.
There are several factors at play here, including the EU's decreasing energy storage which they could have issues with when it comes to building this backup. Moreover, domestic security in the UK of oil and gas is still creating challenges. All these factors combined lead experts to predict turbulent times ahead for the wholesale gas market in 2023.
EU's market could spike again
With the EU having to look elsewhere for LNG contracts, they face a difficult task due to China increasing their demand for LNG this year. The demand is expected to be 9-14% higher than usual due to Covid-19 restrictions lifting, resulting in increased competition for contracts across the market. This could lead to rising wholesale market prices as the demand outstrips the supply of LNG. While these prices will be higher than those of pipeline gas, the EU may have no choice other than to explore this avenue.
Russia's invasion still causing issues for the EU
The UK and EU are still reeling from the repercussions of Russia's invasion of Ukraine in 2022, which has caused major disruptions to their gas supply. Last year saw sanctions imposed on Russia, leading them to throttle their gas supply to the EU which used to rely on Russia for 40% of its capacity.
Despite some supplies continuing throughout last year, it remains difficult for the EU countries to build up their gas reserves before this winter season, thus resulting in price hikes. Russia's actions in Ukraine have resulted in a negative economic flow across nations, affecting many global markets and making it increasingly difficult for countries such as the UK to secure contracts for their energy supply.
Possible colder weather next winter
Our lucky break with mild weather meant that energy demand didn't skyrocket as expected, but now experts are warning that if the UK sees a much cooler winter at the end of this year. On top of our already low energy security and depleted gas reserves, then we could be facing another crisis in terms of widespread blackouts.
With concerns around shortages growing, it's important to begin making plans now so we can prepare ourselves against any potential obstacles and ensure our businesses are sufficiently provisioned.
Low security in the UK
Energy security is a major issue that the UK is currently facing, especially when it comes to ensuring a secure supply of gas. With more expensive imports now being relied upon due to insufficient storage being available within the country, increasing gas prices are becoming a real possibility.
To minimize this risk, efforts must be taken by the government and companies such as Centrica in order to reopen and expand existing storage facilities across the country. The reopening of Rough is a small but necessary step in the right direction, but much more needs to be done if we are going to ease our reliance on expensive imports and ensure an ample inventory for any occurring emergencies or unexpected events.
What does this mean for your business?
Businesses navigating the gas industry this year should brace for an unpredictable ride. With volatile fluctuations in the cost of goods sold, it can become difficult to effectively budget and maintain a high profit margin.
To mitigate the chances of being at a financial disadvantage due to rising gas prices, we suggest that businesses evaluate their options as soon as possible. Comparing gas suppliers and their respective rates early on could save a business time and money - especially when operating with any degree of dependency on the said gas market. Make sure to read up on what's available before making a snap decision; the diligence will be worth it in the end.
