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Will falling gas prices translate to lower bills?

After skyrocketing all summer, the wholesale gas prices in the UK and Europe has dropped a lot in the past few weeks.

Analysts say they don’t think prices will stay low for a long time.

This is primarily because of how the gas market works.

As gas prices went up sharply on foreign markets at the beginning of this year, energy costs for both homes and businesses increased significantly. So, the government stepped in and paid for some of the costs with money from taxpayers.

Until April, the government’s program to guarantee energy prices puts a cap on the average household’s annual bill at about £2,500. After that, people who drive more will have to pay more for gas.

Since then, wholesale prices around the world have gone down. For example, 550p per therm in August was the highest price for gas to be delivered the next day in the UK. Last week, it fell to only 38p.

So, the government will have to pay fewer subsidies than it would have if wholesale prices had stayed high.

But wholesale prices will likely go up again as the weather gets colder.

Forecasters at Cornwall Insight say that if the government doesn’t do more, the average household bill cap will go up to £3,700 in April and stay over £3,000 until the end of the year. So even though prices have decreased, customers will still have to pay more.

Hedging for energy companies

Most energy providers will only be able to take full advantage of the low prices right now if they buy a lot of their gas ahead of time at a higher price.

There is no set price for gas. It can be sold instead to be used in two years, the next month, the next day, or the following year. The price will depend on what you choose.

Businesses that think they will use a lot of gas usually buy a portion of what they will need months in advance if the gas price goes up without warning. Through hedging, they can fix some of their energy costs. Then, they can add more to that purchase if they run out of gas.

Prices for the day ahead are now low because there is a lot of gas on the market. So, anyone who buys now will save money because the prices have decreased. But those who bought ahead of time are different.

Jump in gas prices

After the rush for more supplies, European storage facilities are almost done. LNG tankers have been waiting to get to processing facilities off the coasts of Europe.

But the gas price for delivery in the middle of winter is much higher than that of gas right now.

At the start of this week, gas for delivery the next day was trading for less than 30 euros per Megawatt hour on the Dutch TTF platform, which is considered a European price standard. But in February, the gas price for delivery was more than 130 Euros/MWh. That shows that the market thinks supplies will be even tighter in the middle of winter than they are now.

This price is usually higher than the pre-COVID and Ukraine war prices. But the storage areas are full, at least for the time being.

Moving ahead

After cutting back on Russian imports through pipelines by a lot, Europe depends more on LNG shipped by sea.

Gas used to flow through the Nordstream 1 pipeline from Russia to Germany, but that stopped in September. Shortly after, a series of explosions caused much damage to the pipeline.

Russia stopped deliveries to Poland through the Yamal pipeline. And analysts worry that deliveries through Ukraine may also be in danger.

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Because of this, there has been a massive rise in the demand for LNG. Consumers will refill their storage tanks with more LNG than usual next year. This could cause LNG prices to change for consumers.

European buyers will have to pay whatever the market says because of the reliance of LNG.

China is buying a lot less LNG than usual right now because the shutdown of COVID has hurt its economy. But when that demand rises again, prices will go up a lot.