U.K. Gas Price Record Lifts Borrowing Costs, Alarms Industry
(Bloomberg) -- U.K. natural gas prices surged to a record high in a dramatic move that pushed up the British government’s borrowing costs and prompted industry to warn of shutdowns.
Benchmark gas futures topped 300 pence a therm for the first time, or more than $230 per barrel of oil equivalent, in a fuel supply crunch that’s hit industries from fertilizers to metals and threatens to boost living costs.
The surge in gas prices has been so acute that it’s contributed to rising U.K. borrowing costs, with 10-year gilt yields rising to 1.10%, the highest since May 2019. The 10-year breakeven rate -- a proxy for inflation expectations -- rose 10 basis points to 3.98%, the highest since 2008.
Surging energy prices are heaping pressure on Prime Minister Boris Johnson, who faces calls from industry to use emergency measures, including containing gas and power costs, to ensure companies can keep producing essential goods. Gas supplies have tightened just as the heating season starts, with Britain feeling the blow more than others because it lacks large storage facilities and relies heavily on imports of the fuel.
“The market is getting desperate to get people to stop burning gas right now,” said Ronald Smith, a senior analyst at BCS Global Markets. “It’s a systemic crisis that we’ve got going on here. The market can’t find a way to stop demand in the short-term.”
The Energy Intensive Users Group, an industry lobby group, said the government must provide support to companies to cope with surging energy costs or face halts to production this winter.
The price surge puts even more pressure on U.K. energy suppliers, with many struggling to keep up with the runaway costs. But they can’t pass on those expenses to their customers because of fixed contracts and a cap on bills imposed by the country’s energy regulator. Already, suppliers to more than 1.7 million customers in the U.K. have gone out of business this year.
“If you hadn’t bought ahead or were unable to buy ahead, it keeps getting worse,” Tom Edwards, a consultant at Cornwall Insight Ltd., said of energy retailers. “If you have to spend cash now, you’re not saving cash for later. You might just be delaying the inevitable: You no longer have enough money to pay the bills.”
U.K. gas prices have soared more than 8-fold over the past 12 months, hitting the highest premium over the fuel in the Netherlands since January, as the chart below indicates. The need to import gas from the continent in the winter typically makes the fuel more expensive than in the Dutch hub in the heating season.
Front-month futures in the U.K. rose as much as 24% to 305.94 pence a therm on Tuesday, and closed at 293.91 pence.
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