Published: January 8th, 2025
On 2nd January 2025, British wholesale gas prices rose to £126.19, the highest they've been since the opening days of 2023. Gas prices had been on a upward trajectory throughout last year and spiked recently after a cold start to European winter.
This prompted utilities to top up by drawing on national gas reserves. They also needed to prepare for lost access to Russian gas through Ukraine, which allowed its pipeline deal with Russia and Eastern Europe to expire on New Year's Day.
In an analysis published this week, Capital Economics wrote that ‘once it became apparent that no last-ditch solution would keep Russian gas flowing through the pipeline, benchmark EU TTF natural gas prices pushed through the €50 per MWh mark for the first time since November 2023.’
Forex analysts at CIBC Capital Markets wrote that the rise in gas prices is one reason why both GBP and EUR have shown weakness in recent days against the Greenback.
'Even though gas prices have pulled back from highs seen at the start of the month, this hasn’t eliminated the possibility that EUR/USD could trading below 2024 lows this week.’
CIBC also said the spike in gas prices has been caused by colder than expected temperatures in November and December, plus the end of the European supply deal between Russia and Ukraine.
While forcing a re-think about energy supplies, ending the flow of Russian gas across its territory had been signaled by Ukraine for some time. The rising prices do pose problems for UK inflation and economic growth forecasts, as businesses are also dealing with higher taxes and a recent uplift to the minimum wage.
The UK and EU will have little choice to turn to US and other suppliers of Liquified Natural Gas (LNG), exposing them to higher prices as they compete with Asia for supplies. CIBC says this will keep energy prices elevated for the foreseeable future.
In the Summer of 2022, a gas crisis in Europe gave GBP a lift against the Euro when Eurozone energy prices hit record highs.
As another shutdown of Russian gas supplies loomed on the horizon, the benchmark Dutch TTF price for European gas rose to EUR 290 per MWh, pushing electricity supply contracts in France and Germany to new records.
Those moves pulled the EUR/USD exchange rate below the psychologically important 1.0 level, as forex traders quickened their selloff of the single currency on fears of a coming Eurozone recession.
Surging Eurozone electricity prices were aggravated further by nuclear power station outages in France, and the likelihood of more cuts to the supply of Russian gas in response to sanctions.
On Friday 19 August, the Kremlin said that the Nord Stream pipeline that delivers gas to Germany will be shut for repairs on August 31 for three days.
Tristan Schmieding, Chief Economist at Allianz in Frankfurt, told The Financial Times that the decision was a political one.
‘In what looks like a bid to exploit Europe’s dependence on Russian gas, Russia said that it will close the Nord Stream 1 pipeline for unscheduled 'maintenance' on 31 August’.
The decision to halt supplies is happening in the middle of a gas bidding war as European governments try to fill their gas storage facilities ahead of what looks to be a winter of political discontent.
In early Autumn 2022 the GBP/EUR rate rose to 1.1855, taking bank account transfer rates to around 1.1589 and rates given by independent payment providers to above 1.17.
'Summer's end saw EUR back under pressure, partly because the Greenback is in bid and partly because the worries hanging over the European economy aren’t going away anytime soon,’ says Karl Jucken, Head of Forex Strategy at Berenberg Bank.
‘The spike in natural gas prices and a shifting economic outlook are undermining prospects for EUR in forex markets. Both factors could continue to pressurize the Euro lower in the short term,’ Jucken added.
The UK was also feeling the pain of higher gas prices, but investors saw the Eurozone as being gravely exposed to the downstream impacts of the war in Ukraine.
That was largely due to the heavy reliance on gas by German manufacturers who needed it as a reliable, low-cost source of power for their factories. If higher energy costs slowed growth in the Eurozone's industrial heartland, traders believed it could spark a wider slowdown across the region.
While UK gas prices were also subject to market forces on the continent, there were notable differences. Britain still had its own domestic gas production in the North Sea, as well as terminals configured for offloading and processing of seaborne Liquified Natural Gas (LNG).
Germany, by contrast, had no suitable LNG terminal at its ports and relied heavily on the NS1 pipeline.
The UK's top gas provider is Norway, arguably a more stable supplier than Russia, which has used its heft to put political pressure on Germany and other EU countries in a bid to have sanctions lifted.
Sterling had been up against the Euro for much of June 2022 after UK labour market figures revealed a strong rise in wages and a bigger than expected drop in unemployment.
The print from the Office of National Statistics showed that UK wages rose faster than expected in June, while job vacancies remained high in an environment of low unemployment.
The ONS wrote that average British earnings were on the rise, with an increase of five per cent in June when bonuses were included. That was above the 4.5 per cent market consensus expected, though less than May's 6.1 per cent rise.
Average earnings excluding bonuses rose by 4.6 per cent, above market expectations of 4.5 per cent and bettering the 4.3 per cent growth posted in May.
