LCP Delta: Dash for gas could see UK household energy bills and inflation increase in Q4

Amidst widespread concern across Europe on replenishing gas stocks ahead of winter, Sam Hollister, Head of Economics, Policy and Investment at LCP Delta, warns that rising energy bills and inflation could return this winter according to their latest Power Insights analysis: 

“Thanks to record high gas stock levels across Spring, we have seen declining global energy prices and this has fed through to the recent fall in UK inflation – now sitting just shy of Bank of England targets at 2.3% .  

“However, our latest analysis reveals worrying signs that higher energy costs could rebound this autumn. With storage levels beginning to be eroded and supply threatened by the ongoing war in Ukraine, households are faced with the real risk of an inflationary sting heading into winter as energy bills look set to rise. 

“Since Russia's invasion of Ukraine disrupted pipeline flows, Europe has become heavily reliant on inter-seasonal storage to protect and bolster supply in the colder winter months. However, high stock levels are being eroded as LNG exports are being diverted away from Europe, into higher-priced Asian markets. 

“While European gas storage currently sits at 72%, this doesn't account for the risk of Russian aggression targeting Ukraine’s energy infrastructure which, coupled with ongoing conflict in the Middle East threatening LNG trade routes, is creating fervour among traders of a possible tightening of supply later this year as the heating season nears. 

“If Ukrainian storage is lost, Europe's storage buffer would fall further into the 5-year range, with this shrinking margin increasing the chances of a "dash for gas" by utilities to avoid winter shortages.  

"There is already a lot of speculative bidding in the gas markets, betting on tight gas supplies in the winter increasing the price of gas further. These high prices and tighter supply margins would ultimately be passed onto consumers through energy prices in October’s energy price cap, and a further inflation pinch.” 

“Over the course of the next four to six weeks, we should see storage levels begin to respond and start building up ahead of winter. However, if gas deliveries are not forthcoming, then we will begin to see prices increase, making for a potentially expensive winter. Much of this will be driven by speculative traders buying now on the assumption of the market experiencing tighter supplies.  

“If storage levels aren’t replenished now, we could see a dash for gas later this year, as we hit prime heating season. This could result in an even bigger leap in the January energy price cap.”