Why aren’t falling gas prices calming bills and inflation?

Why aren’t falling gas prices calming bills and inflation?

For several months, gas prices in Europe have been falling, moving away from their record highs seen at the start of the war in Ukraine, but this drop should not be reflected beforehand…

Gas prices have been falling in Europe for several months, away from their peaks seen at the start of the war in Ukraine, but that drop shouldn’t affect bills or inflation for months.

The war in Ukraine pushed the futures contract TTF, the benchmark for European gas in the financial markets, to an all-time high of 345 euros per megawatt-hour in March, days after the start of the Russian invasion of Ukraine.

British gas had also hit a record price of 800 pence per therm (a unit of heat).

After rebounding, they approached record highs again in August, following the announcement of the suspension of Russian supplies via the Nord Stream 1 gas pipeline.

Since then the price of TTF has lost more than 66% and UK gas around 57%.

Electricity prices experienced the same insane increase at the end of August, the supply contract in early 2023 in Germany, which serves as a benchmark in Europe, was unheard of at over 1,000 euros per MWh.

Unlike gas, the price of electricity has risen by almost 175% since the beginning of the year and energy bills have skyrocketed: in the UK, for example, they have doubled in a year.

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In Germany, energy tariffs for households are regulated by the sectoral authority Ofgem and reflect price fluctuations in the markets, albeit with a time lag as they are only reassessed every three to six months.

Even as the bills continue to mount, they are largely mitigated by significant state subsidies in several European countries, which also helps to decouple energy prices and market prices.

Bills are currently capped at £2,500 per average household per year from 1 October to April in the UK for example.

That represents an 80% increase compared to prices prevailing this summer, but without government help this regulated price would have reached around £3,500 and likely even more in January, according to analysts.

Energy support measures have been taken in other European countries, notably France, where they affect households but also businesses and communities, or even Germany, which announced a massive €200 billion plan at the end of September.

“So this means that the exorbitant prices that we have observed (on the markets) in these 3 to 6 months have not yet fully passed to electricity prices for consumers,” summarizes Georgi Slavov, analyst at Marex.

Additionally, currently regulated fares are only capped across the channel until April and should rise thereafter, at least until next summer, warns Paul Dales, economist at Capital Economics.

price guaranteed

Even the energy companies that buy electricity in the markets rarely pay for it at the spot price, because they smooth their costs with futures contracts that guarantee them a certain price for a certain period of time – a kind of price insurance.

But on the contrary, when prices fall, it is no longer possible to profit from them until it is time to buy back contracts.

Airlines also buy the fuel they need on the basis of a futures contract, explains independent analyst Howard Wheeldon.

“The price for consumers will remain high for some time,” he continues.

According to Paul Dales, inflation, which is around 10% in the UK, is unlikely to drop much below this level before July.

Gas or electricity prices could rise sharply in winter if the previously mild temperatures drop or if a new geopolitical event restricts supply.

Not to mention a possible restart of China’s economy, and thus its demand for liquefied natural gas, if the country ends its zero-Covid policy with its restrictions eroding activity.

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Reference: www.guadeloupe.franceantilles.fr

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