Hello, and welcome to this week’s Smarta Energy market update.
There has been a small fall in gas prices this morning, but I want to put that into perspective straight away. This is not a return to anything resembling a normal market. Prices remain extraordinarily high, driven by geopolitics, weather and concern over Europe’s ability to secure enough gas through this winter and refill storage next year.
Perhaps the clearest example is Summer 2027 gas. At the time of recording, that contract is trading at around 180 pence per therm. At the beginning of this year, it was close to 60 pence. In other words, the price has roughly tripled in ten months.
For an even wider comparison, the equivalent Summer 2020 contract eventually closed at roughly 18 pence per therm. We are therefore paying around ten times that level today. Admittedly, 2020 was unusually cheap, but it shows how far conditions have moved from the prices businesses once knew.
That is the bigger picture for this week. The market may rise or fall from one day to the next, but the overall cost of future energy has changed dramatically.
Let us start with the immediate gas position.
Day-ahead gas, which is the price for delivery tomorrow, closed on Friday at around 253 pence per therm. It has moved a little lower this morning, towards 250 pence, as weather forecasts turned slightly milder and another round of Middle East diplomacy created some cautious optimism.
And let’s be clear here, we in the UK are not facing an immediate shortage. Demand is slightly below normal, Norwegian supply is strong and production should actually improve as maintenance ends at the Oseberg field. We can also see that LNG supply has increased sharply through South Hook in South Wales. This s keeping the system balanced. But, it should not be mistaken for cheap or plentiful energy. The UK is only one part of a much larger European market competing for the same gas.
European storage was only 74.6% full at the end of October, the lowest level recorded for this point in the year. Germany, which has the largest storage capacity in Europe, was just 61% full. Withdrawals are now beginning, which means the opportunity to build a comfortable buffer before winter has largely passed.
The UK currently has six LNG cargoes scheduled for November, compared with a usual monthly average of around sixteen. Those deliveries will help, but every cargo matters when Europe and Asia are competing for Middle Eastern supply.
This brings us back to the Strait of Hormuz. Iranian and Qatari officials have held further talks, and Iran has suggested the route could reopen within two days if an agreement is reached. Reopening the Strait would improve access to Qatari LNG and could bring prices down quickly.
However, there is still no agreement. An attack on a Qatari LNG vessel has also shown that even ships believed to have permission to pass may remain exposed. The market is giving some value to the talks, but little confidence that normal shipping will resume immediately.
Weather is the other major factor. The UK and mainland Europe will be colder than normal this week, before forecasts suggest a return towards more seasonal conditions from the weekend. Longer-range forecasts for December have also become milder.
That gives prices room to fall if the forecasts hold, LNG arrivals continue and diplomacy improves. Any decline would create a welcome purchasing opportunity. But with storage so low, a colder forecast or another supply disruption could reverse it quickly.
This is why the Summer 2027 price matters so much.
Summer is when Europe normally rebuilds storage after winter. The current price tells us the market is worried about how difficult and expensive that job could become next year. If stocks finish this winter very low, Europe will need to compete aggressively for LNG throughout the summer.
Interestingly, prices fall sharply after 2027. This reflects expectations that global LNG supply will expand and some of today’s exceptional risks will fade. This could happen. New supply projects are progressing and a Middle East settlement would change the outlook significantly.
But those lower future prices are market expectations, not guarantees. The immediate challenge is getting through this winter and rebuilding storage next year without another major disruption.
Okay, let’s turn now to power where the same gas story remains central because, as we have discussed most weeks together, gas-fired generation often sets the price of electricity when renewable output is low.
The contract for front-month power delivery ended last week close to 197 pounds per megawatt-hour. That is well above the recent average for buying power one day in advance. Businesses with genuinely flexible strategies may still use some day-ahead exposure rather than purchasing everything in advance, but this must be managed carefully. Day-ahead prices are still very high and can move sharply when wind falls.
That is particularly relevant this week. UK wind generation is expected to average around one-third below normal and could fall from more than 10 gigawatts to roughly 2.5 gigawatts by the weekend. When that happens, the system needs more gas-fired power at a time when gas itself is extremely expensive.
Nuclear generation is expected to improve slightly, which will help soften some of that pressure, but not remove it. UK day-ahead power was still trading above 200 pounds per megawatt-hour this morning despite stronger wind at the start of the week.
The pressure is not limited to the UK. French day-ahead power was above 250 euros per megawatt-hour this morning, even with nuclear generation around 42 gigawatts and France exporting power. High regional prices are being driven by expensive gas and wider European tightness, rather than simply a shortage of French generation.
Russia has also continued attacking Ukrainian energy infrastructure. Further damage could increase Ukraine’s need for European electricity and gas as temperatures fall, adding another source of demand to an already tight regional market.
Further ahead, Ofgem has launched a 3.5 billion pound tender to connect the 2.9 gigawatt Hornsea 3 offshore wind farm by the end of 2027. Projects of that scale should reduce the UK’s reliance on gas over time, although they cannot solve this winter’s problem.
Markets will also watch Tuesday’s US midterm elections closely. A change in control of Congress could affect perceptions of how much freedom the White House has to escalate the conflict with Iran, influencing the geopolitical premium in gas and power prices.
So, what should we be watching over the next few days?
First, whether talks involving Iran and Qatar produce anything concrete. Headlines may move prices, but the real turning point would be evidence that the Strait can reopen safely and LNG shipments can normalise.
Second, the weather. A milder second half of November and December would limit storage withdrawals and give the market more confidence. A colder revision would do the opposite.
Third, LNG arrivals and European storage. The UK can be balanced today whilst the wider European position remains extremely tight. The speed of withdrawals will shape prices for both this winter and Summer 2027.
To summarise, gas prices have softened this morning, but remain at crisis-era levels. The UK supply position is balanced, and prices could fall further if milder weather, stronger Norwegian supply and Middle East diplomacy all develop positively.
Against that, European storage is at a record low for this time of year, LNG shipping remains disrupted and the market is already pricing in a difficult storage refill next summer. Power prices remain closely tied to that gas risk, particularly when wind generation falls.
This remains a market in which opportunities can appear quickly, but so can further increases. Businesses do not need to react to every daily movement, but they should understand their exposure and be ready to act when value appears.
If you would like to discuss what these developments mean for your own contract or purchasing strategy, please speak to our Trading and Risk team at Smarta Energy. We are always happy to talk through the options in plain English.
Thank you for watching, and I will be back next week with another update.
Disclaimer
This market update is provided for general information only and reflects market conditions at the time of recording/publication. It should not be treated as financial, legal or procurement advice, or as a recommendation to buy, sell, fix or trade energy at any particular time. Energy markets can change quickly, and businesses should seek advice based on their own circumstances before making procurement decisions.
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