Oil has taken something of a back seat recently as its influence on gas prices has been heavily outweighed by the Ukraine situation. It would be foolish to ignore it, though, since it will continue to be the long term fundamental driver of energy prices. There are two key things to look out for in the short term: the first being the new G7 prices cap and refined product embargo on Russia. Analysts expect this to cause a reduction in the global supply of oil as Russia runs out of capacity to divert supplies to Asia. At the same time, a reviving Chinese economy is expected to drive prices up further. With OPEC already under-producing versus its quotas and a slow down in growth of US shale oil, the outlook for the crude price is distinctly bullish.

Europe had allowed itself to become dependent on Russian gas. The question that has brewed since before the war is: To what extent are we critically dependent upon it? The huge price spikes in August were a reflection of the real uncertainty about this – the key question is to what degree that uncertainty has gone away.

The chart (below,right)shows where imports of gas have come from every month since the beginning of 2021. The red bars are imports from Russia – now dwindled to almost nothing. The blue bars are imports from Norway, which have remained fairly constant. There are two things that have made up the difference: (i) reduced overall demand in response to mandatory and voluntary measures by industry, and (ii) a significant increase in Liquified Natural Gas (LNG) shipments.

Whilst this is encouraging, and proves that we can survive entirely without Russian imports, it is important to note that LNG flows to the highest bidder. Whilst we can be comfortable that physical security of supply will be met, it comes at a price. Storage capacity is also increasing – Centrica has recommissioned the North Sea Rough storage facility in double-quick time. This is great news for day-to-day physical security, but also means higher demand for gas over the summer (to fill it up). This combination suggests that overall prices are likely to be more stable, but will remain relatively high.

Gas-fired electricity generation still makes up some 40% of the UK’s electricity production and continues to be the ‘marginal’ form of baseload generation, which means it sets the price for the market. As such, all the trauma of the gas market feeds directly into power prices, so they remain stubbornly linked. The industry has had its additional pressures, with the majority of the French nuclear fleet out of action until recently and carbon prices becoming almost as volatile as energy in recent times. On the positive side, the proportion of renewable generation continues to increase – and when the wind really picks up it becomes the highest single contributor!