Providing for the UK’s Energy Needs

UK Gas Market (continued...)

Gas Price: Three factors have been shown to be driving UK wholesale gas prices over recent years:-

• Linkage to European, oil indexed markets
• Supply-demand balance
• Market sentiment

After the relatively low gas prices seen in the latter half of the 1990s, UK gas prices have risen substantially in the last five years as the gas surplus in the UK has diminished and oil price has risen. UK gas prices have followed oil prices due to the linkage to the continental gas market, from the time the Interconnector was commissioned in late 1998. Figure 20 shows the variation in UK gas price over the last five years, with Brent crude price shown for comparison. This demonstrates the linkage to oil price with a lag of 6-9 months.

When oil prices increased from $20/barrel in 1999 through to $30/barrel in mid 2000, a similar shift occurred in the gas market, with the quarterly average gas price rising to 27p/th in January 2001. Gas prices declined between 2000 and 2002 as the nominal oil price declined; however they have since risen steadily.

Figure 20: Correlation of UK gas and oil prices 2000 – 2004

Gas prices over the last 18 months also demonstrate the impact of both the changing supply demand balance and swings in market sentiment. The daily NBP traded price peaked in late January 2004 at 70p/th and again in early March 2005 at 116p/therm against an average day ahead price of 25p/th. In both cases the price peaks were caused by tight supply during cold weather when demand was high. The forward price curve for Q1 2005 has shown a rising trend over the last year on the back of increasing oil prices. The forward price peaked in October 2004 at around 70p/th, albeit with very thin trading. This peak was to a large degree driven by market sentiment which was then uncertain on the overall gas supply balance during winter 2004/05. It also coincided with the start of the new gas contract year which may have had an impact.

Figure 21 - UK NBP Gas Prices 2004 - 2005