Millions of UK households could be spared the worst predicted energy bill rises.
After weeks of alarm over a potential global gas crisis linked to the Iran conflict and disruption in the Strait of Hormuz, markets have taken a markedly calmer turn. UK gas prices, which surged to a three-year high of 180p per therm in March, have now slumped to around 104p – even lower than levels seen at the start of the year. European prices have followed the same trend, dropping from €74 per megawatt hour to about €41, raising hopes that the worst-case scenario for household bills may be avoided.
The shift is already feeding through into forecasts for the energy price cap – the key measure that dictates how much most households pay.
Latest modelling from Cornwall Insight suggests bills will rise by around 13% in July – a sharp downgrade from the 20% increase feared just weeks ago. That would take a typical annual bill to £1,861 – less than £20 a month more than current levels.
While still an increase, it is far less severe than many had braced for – and a world away from the spiralling costs seen after Russia’s invasion of Ukraine, when bills briefly surged above £4,000 before government intervention capped them.
The easing in gas prices will come as a major relief to Chancellor Rachel Reeves, who is already grappling with mounting pressure on the public finances.
Lower wholesale costs could also help rein in inflation and reduce government borrowing costs, after gilt yields jumped sharply in the early stages of the conflict. This would be a positive for the Chancellor given that the IMF warned just this week that the UK is particularly vulnerable to energy price shocks.
The IMF marked down predicted UK growth this year, which may have been overly pessimistic against the background of figures announced today showing GDP in February rose by a higher than expected 0.5%.
James Carter, co-head of fixed income at investment firm W1M, said the drop in wholesale prices was “a clear positive for the gilt market”, adding it would “cap the near-term inflation spike and reduce the risk of second-round effects”.
He added: “That keeps the Bank of England on track to resume its pre-crisis path of gradual rate cuts.”
The turnaround in prices has been driven in part by weaker demand from Asia, particularly China, where energy producers have ramped up coal-fired generation instead of competing for scarce gas supplies. That has freed up shipments of liquefied natural gas (LNG) for Europe, helping to stabilise markets despite ongoing disruption in the Middle East.
Massimo Di Odoardo, of consultancy Wood Mackenzie, told the FT: “Chinese LNG demand has been in freefall since the start of the conflict. That has been limiting competition for available spot cargoes and kept a lid on prices.”
Supplies have also proved more resilient than expected, with producers outside the Middle East increasing output to take advantage of earlier price spikes.
Analysts at UBS said there had been “a clear supply response” from global facilities, helping to offset the loss of shipments from Qatar and the UAE.
Even so, experts warn the situation remains fragile. Qatar – which normally supplies around a fifth of the world’s LNG – is still facing major disruption, with a significant portion of production potentially offline for years after recent missile attacks.
Anne-Sophie Corbeau, of Columbia University’s Center on Global Energy Policy, warned markets may be underestimating the risks.
“People are still thinking that this will be over within two or three weeks one way or another and the Strait of Hormuz will reopen miraculously,” she said.
“This may be the case but there’s also a high probability that this won’t be the case.”
There are also concerns that prices could climb again later in the year if Europe struggles to rebuild gas storage levels over the summer.
Craig Lowrey, principal consultant at Cornwall Insight, said the market could be in “the calm before the storm”, with supplies at risk of becoming “increasingly constrained”.