Energy prices have been forced higher still as we move into July. There is significant bullish pressure coming from higher carbon, coal and oil prices, as well as from low renewable output. However, the biggest steer is coming from gas.

As previously mentioned, gas storage has already been affected by the prolonged cold weather across Europe this spring, meaning storage replenishment for the coming winter season has been compromised. This has resulted in storage levels being significantly below historic levels for this time of year. Physical gas demand in Europe is high, but the demand is not being satisfied – Liquefied Natural Gas (LNG) is not as abundant as in recent years as Asian demand increases to fuel the economic recovery in China and elsewhere. More significant, however is the question of Russian gas flows into Western Europe. Russia seems to be using its dominant position in the gas market to dictate price, exporting far less gas than normal. Whilst the UK does not use Russian gas, a lot of nations on the continent rely on it, so there is a squeeze on the price of what is available – as such the front Annual for gas is at the highest level for 12.5 years, and there is significant backwardation on both power and gas Annuals, with ’22 and ’23 being at a significant discount to October ’21.

Prices are down as I write, but this is a fractional correction compared to the spike seen. There may be some respite in that the weather across Europe seems less extreme than seen in recent summers, so cooling demand should be off and we should not experience issues with low river levels compromising nuclear cooling and hydro schemes. And if Russia (literally) opens the taps on gas, then a wave of bearishness should follow.

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