Winter gas shock coming for UK consumers?

Gas prices have fallen and consumers will start to feel the benefit during the warmer months, but there could be problems this winter, warns Panmure Gordon’s oil & gas analyst Ashley Kelty. Watch him talk to interactive investor’s head of equity strategy Lee Wild about energy bills and the possibility of power blackouts.

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Lee Wild, head of equity strategy at interactive investor:Hello. With me today I have Ashley Kelty, director and oil & gas research analyst at Panmure Gordon. Hi Ashley.         

Ashley Kelty, director and oil & gas research analyst at Panmure Gordon: Hi, how are you?

Lee Wild: Very well. Look, Ukraine has obviously had a significant impact on oil over the past 12, 15 months. But what would happen if there was a resolution to the conflict tomorrow or has the world adjusted and moved on?

Ashley Kelty: I think in terms of oil the world has essentially adjusted and moved on. The sanctions have not had as much of an impact in terms of supply as I think the G7 and EU would have hoped. Yes, it has hurt Russia financially because the crude that they are selling to China and India primarily has been at a huge discount. However, they are still able to sell crude at relatively similar levels to that pre-Ukraine.

However, the real impact of assessment and Russia coming back into the market would be in the gas markets. The gas markets have been impacted more than oil, particularly in Europe, and we’ve seen – the prices were rising even before Ukraine and that was a consequence of years of under-investment.

However, the removal of Russian gas from Europe has had a huge impact in that this year Europe will need to replace 60 billion cubic metres of gas that it received from Russia last year, even with the impact of sanctions factored in.

However, due to the mild winter and the ample supply of LNG [liquified Natural Gas] last year, prices have remained high, certainly well above historic levels, although they have come back to much lower levels. Europe dodged a bullet through the warm weather and ample storage allowed them to keep the lights on and there weren’t any blackouts.

However, the challenge will be this year in refilling the gas storage facilities. Yes, there will be plenty of LNG. However, as China reopens, a lot of that LNG will be displaced from Europe to Asia and that will push prices up as well, coupled with the replacement of 60 billion cubic metres of Russian gas. So as a result, I don’t think there’s any scope for gas prices to drop below current levels.

I think there is also an element of hubris built into that, in that a lot of people feel that we got through last winter without any major problems and that we will be OK in the future. It was always the case that this coming winter there’s always going to be the real challenge. And I think that prices are likely to rise, and it will be a difficult winter for gas coming on this year because there isn’t ample, well there aren’t any major LNG projects coming on stream this year that will be able to create the supply to meet growing demand in the next year or two. 

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Lee Wild: So I’m thinking in terms of the UK consumer and next winter, gas prices are coming down, a lot of UK consumers are seeing, or will see perhaps, lower bills, but you think there could be another shock coming further down the line?

Ashley Kelty: I think prices are arguably too low at the moment, although well above historic levels. As I mentioned, this winter will be particularly challenging, and I think we will see gas prices remaining relatively low over the coming months but I think they will start rising in the second half of the year. In terms of when that will feed into consumer energy bills, that will be towards the backend of this year and into 2024.

I think there is scope, given the reopening of the [Chinese] economy, that there could be blackouts this year, and the lower price will also encourage a lot of industrial facilities which shut in last year when gas was 300, £400 a therm, to reopen when it’s less than a hundred. And that will increase demand and I think it’s likely that we’re going to have a colder winter than we’ve just experienced and demand will go up and the LNG supply being reduced as China reopens.

I think prices will rise markedly as Europe will have to compete with Asia for LNG, and obviously the price will increase as the US and Qatar are agnostic to where the cargos go as long as they get the best price.

Lee Wild: Great. Ashley Kelty, director and oil & gas research analyst at Panmure Gordon, thanks very much for joining me today.

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