Excess Gas Drives Down Prices in UK, Even as Prices Across Europe Rise

Excess Gas Drives Down Prices in UK, Even as Prices Across Europe Rise
The landfall facilities of the "Nord Stream 2" gas pipline are pictured in Lubmin, northern Germany, on Feb. 15, 2022. (AP Photo/Michael Sohn)
Naveen Athrappully
5/12/2022
Updated:
5/12/2022

An unprecedented supply glut of liquefied natural gas (LNG) has driven down wholesale gas prices in the United Kingdom to low levels, while across the English Channel, Europe struggles with high gas prices.

Britain’s terminals are receiving LNG cargoes intended to be transported to Europe through subsea pipelines. However, “the rate of LNG imports has exceeded the ability of the interconnector pipelines to export gas, leading to an imbalance in gas supply and demand in the UK, amplified by the UK’s lack of meaningful gas storage capacity compared to other European gas consumers,” said analysts at wealth management and investment banking company Stifel, according to The Times.

As a consequence, the UK day-ahead gas prices are at about 40 pence ($0.49) per therm when compared to over 200 pence ($2.47) per therm in continental Europe. Back in March 2022, gas prices in the UK were at over 500 pence ($6.17) per therm.

According to Thomas Rodgers, European gas analyst at the price reporting agency ICIS, the current price differential between the UK and European markets is “insane” and “unprecedented” as the two markets usually tend to be correlated.

Prices in the two markets began to diverge in mid-April. While demand for gas in the UK dropped due to the warmer weather, demand in Europe is rising as the region is seeking alternative sources to Russian supplies, and for restocking the continent’s storage prior to winter.

Following Moscow’s attack on Ukraine, European Union members decided to pursue energy independence from Russian supplies. In April, Russian energy firm Gazprom cut off natural gas supplies to Poland and Bulgaria as the countries failed to make payments in rubles.

Tensions spiked after Kyiv’s state-owned grid operator Gas TSO of Ukraine (GTSOU) announced on May 10 that it was suspending gas flows through its Sokhranivka entry point station, which is responsible for transporting one third of the gas flowing from Russia to Europe. As a result, European benchmark natural gas contracts rose by over 22 percent on May 12.

Moscow also sanctioned a former Gazprom subsidiary on May 11 that is presently under the control of the German regulator, adding to worries about gas supply.

However, Germany’s economy minister dismissed such concerns, stating that the Russian cuts only affect 3 percent of the nation’s imports, which it can cope with as Berlin secures gas shipments from other sources.

“The developments are only the latest in a string of a steady deterioration of security of supply amid the war,” Eurasia Group said in a note, according to Bloomberg. “The ongoing disruptions will therefore mean EU states will step up preparations for bigger gas supply disruptions from Russia this year.”