Since the start of the year, gas prices have tumbled dramatically to historic lows. There are several reasons for this, and we shall highlight each in detail.
The decreasing possibility of Russia shutting gas supplies will cause prices to lower. It is not in Russia’s interest to cut off gas supplies as it is facing economic hardship with low oil prices and economic sanctions. Low oil prices have reduced the government’s revenue. Added to economic sanctions, this means that any further loss in revenue would see Russia in a full recession. Fortunately, the furthest west Russian gas goes is up to France, so the UK’s exposure to Russian gas is non-existent.
There is also a glut of LNG coming into the UK. This is creating oversupply in the system as demand is decreasing on the back of warmer than normal temperatures. At least four LNG tankers are scheduled to dock in the next two weeks.
Additionally, warmer than usual weather has reduced demand for gas significantly for this time of year. Thus far, we have escaped any real winter and temperatures are expected to rise next week, meaning that demand will continue to decrease.
Another reason for historic lows for gas prices is a focus on energy efficiency. Demand will continue to fall throughout the year with enforced EU energy efficiency legislation. ESOS, which will need to be reported, has forced over 10,000 businesses to conduct energy audits. On average, 25-35% of business are following this up with implementation of energy efficiency products and strategies, with some technologies guaranteeing savings of 18%. Other technologies have been known to reduce gas demand by up to 60%!
Overall, dwindling geopolitical risk and strong LNG coming in from around the world have weighed on prices. On the demand side, this is reduced on two fronts: mild weather and increased energy efficiency. The mild weather is lessening the demand for heating, while more businesses and domestic building are becoming more energy efficient, a trend that will continue with further building standard regulation.
