Although oil has become a less significant driver of gas prices in recent times, it is still the most important long-term factor, since so many upstream contracts are linked to oil prices. Oil has been trending gently down over the last quarter, driven by high-interest rates and their impact on the global economy as most large economies grapple with runaway inflation. Saudi Arabia and OPEC are trying to stem this by cutting production, with a drop of a million barrels per day coming in July; however, the markets remain ‘bearish’ as even the Chinese economy (which had started to bounce back after finally lifting COVID restrictions) has become sluggish again.

Gas prices are of most significant interest to UK consumers at the moment (not least because they directly drive electricity prices). The continued gentle drop in prices since April was abruptly interrupted in early June after it was unexpectedly announced that some planned maintenance outages on Norwegian gas fields had to be extended. This, combined with a short-term spike in power demand caused by increased cooling requirements in the hot weather (the extra demand being met by gas-fired generation because the wind had also dropped), created a disproportionate level of panic in the markets.

Although the spike didn’t last long, prices have still not recovered back to April levels, which indicates that traders remain very much on edge. The underlying reason for this anxiety is the precarious situation we remain in for the winter ahead. As described above, the systems across Europe coped as best as could be hoped for last winter, but not every variable that went our way is guaranteed to do so again – and we are still missing that 30% of supply historically provided by Russia. The weather is unpredictable – an early or prolonged cold snap could deplete storage levels quickly, leading to risk later in the season. LNG has been crucial in filling the supply gap, but with reports of increasing Asian demand, we may have to pay more to secure it for ourselves Finally, a return of depressed industrial demand could add extra pressure to the market. Whilst there is no expectation for prices to return anywhere near last year’s highs, buyers should not bank on continued drops.

Electricity prices correlate very closely with gas prices, with extra complexity added by its supply constraints and an additional layer of cost in the form of carbon prices to consider. Renewables (mostly wind turbines and solar panels) now constitute a significant portion of UK electricity generation (around 40% last year). Although the long-term impact of this is to reduce wholesale electricity prices, the variable and uncontrollable nature of the source sometimes causes problems – when wind speeds are low during times of high pressure, the difference between generation and demand has to be made up from other more expensive means

Another cause for concern for electricity at the moment is the French nuclear fleet. France is largely dependent upon nuclear energy, so when there is a shortfall it has to import it from other grids, including the UK’s. The ageing nuclear fleet has suffered from poor reliability in recent years and recently announced delays to restarts due last month have done nothing to inspire confidence for the winter ahead.