UK Gas Prices Skyrocket Amid Rising Tensions in the Middle East
Gas prices in the UK have surged dramatically, nearly doubling in just a week (https://www.cityam.com/gas-prices-surge-as-qatari-plant-hit-by-iran-strikes/), as the conflict between the US and Iran intensifies. The wholesale gas prices, which represent the cost of natural gas for energy suppliers, have skyrocketed by 93% this week alone.
The price of gas briefly soared to 151 pence per therm, a level not seen since February 2023, before settling at around 148 pence. This surge follows a 32% jump on Tuesday, on top of a 50% rise on Monday.
Economists warn that these soaring prices could significantly impact inflation and growth. Sanjay Raja, chief UK economist at Deutsche Bank, highlights the potential for increased risk premia, freight disruptions, and stock-building in oil and gas markets.
The main economic consequence, according to Investec economists, would be a boost in inflation. They estimate that the current oil price level, if sustained, would add 0.2% to headline inflation due to higher petrol prices. A sustained 40% increase in natural gas price futures would further boost inflation by approximately 0.7% through higher household utility bills.
Analysts at Stifel caution that any sustained rise in wholesale gas prices could lead to a significant adjustment in Ofgem's price cap. A tripling of prices could result in the cap jumping to nearly £2,500 annually, a level not seen since Russia's invasion of Ukraine.
The initial gas price surge was triggered by a Qatari state energy company's decision to halt production of liquified natural gas (LNG) following military attacks by Iran. Qatar, the world's largest LNG export plant, supplies around 12-14% of Europe's LNG imports, making the situation particularly dire for the continent.
Meanwhile, oil prices have also extended their run, rising by 3.2% on Tuesday morning to $80 per barrel (https://www.cityam.com/oil-price-surge-pushes-investors-to-bet-against-interest-rate-cut/). Richard Hunter, head of markets at interactive investor, notes that oil price spikes often follow conflict outbreaks, but the duration and escalation of the conflict are more concerning than the immediate outlook, as many countries have accumulated stockpiles to sustain them through the coming months.
