Since posting the midsummer and subsequent late summer editions of Energy Highlights, the petroleum, gas and electricity markets have continued their predicted climb upwards. Pausing for breath just twice along the way, mid-July and mid-September. Going to wire the oil, natural gas and the electricity market in particular have caught the tailwinds again and look likely to test 4 year high again later this week.

As of now, 28th September their respective October Year ’26 contracts are trading up at circa $ 105 /bbl, 160 p/therm and £150 /MWh respectively compared their $ 75 /bbl, 70 p/therm and £70 /MWh levels at the start of the year.

The coming winter could see further pressure on the gas prices if the USA restricts or is unable to supply sufficient exports of shale gas and a buying competition breaks out between European and Asian users in a hunt for limited LNG cargoes. Mid September has already witnessed one bidding war between South East Asian buyers themselves with several spot cargoes executed over $27 /MMBTU. With one US dollar currently buying about 75 p, this LNG price already works out at over £2 per therm. NBP gas currently trades at third less. So increased competition in the global LNG market will ceteris paribus introduce UK gas prices to another tailwind.

The weeks ahead could well see a point of inflection. Wholesale prices could fall were the USA to negotiate a peace settlement or be successful in completing a decisive attack, one seen to permanently neutralise the Iranian regime and see only limited collateral damage, allowing production of oil, gas and petrochemicals to recover early and exports to resume through the Strait of Hormuz, however optimistic sounding to some. Alternatively, we could see prices inflected higher still amid a worst case scenario involving sporadic strikes which see significant new collateral damage inflicted on oil & gas production, gas processing, oil refining, petrochemicals production and export facilities across the Gulf region with all-out strikes by Iran, Houti militias and other pro-Iranian factions joining the fray; maximising the disruption to exports from Gulf producers.

Export disruption could well be more prolonged than current market prices reflect, possibly extending deep into 2027, much depending on the extent of final damage to production & export infrastructure. This is perhaps just one of many unknowns and it is a chief reason why the USA has been holding off and a stalemate persists, or for the time being.

Meanwhile crude oil prices have continued to hover in a loose trading range around $100 /bbl. However, there are two important things to consider:

Firstly, the US Strategic Petroleum Reserve has been ‘used in anger’ this year for the first time in its history i.e. as a commercial buffer and to stop oil prices from rising too much and not for its strict, contingency purpose. As of now, over 65% of the oil stored has been withdrawn, ostensibly leaving 35% in reserve although for technical reasons and overriding US defence imperatives the reserve cannot be depleted below 30%. So in short the SPR has almost run dry before winter has even kicked off.

Secondly, there is a relative calm in crude market itself but this belies the actual buying frenzy in the refined products market, notably in respect of diesel whose retail price has been breaking new records of late. This is in part thanks to increased reliance on oil & key petrochemical products from the Gulf region and in part thanks to these same units being targeted. The dearth of physical gas market liquidity has also been aggravated by Ukrainian attacks on Russian oil refineries, disrupting its war machine but also significant exports of kerosene (jet fuel /paraffin), of gas oil (diesel) and increasingly of fuel oil where shortages to date are already placing exceptional pressure on shipping. So China, India and other South East Asian economies could, just like they are in the LNG market, drive up diesel prices.

So we now see the spectre of mercantilism breaking out. Strictly speaking a form of ‘reverse mercantilism’ with oil, gas and oil products producing countries restricting their exports.

Time will tell whether or not the UK will see tangible fuel shortages and/or related disruptions to electricity supply. But the risk is there and the spectre of Sterling falling in consequence, increasing import prices cannot be ruled out. Returning specifically to the diesel, which arguably the most vital distillate which powers industry, the mining & construction sectors, almost all commercial vehicles, buses, coaches, trains and emergency generators, this market has never faced a supply disruption in the past. We are well into unchartered waters therefore. The closest the global economy would have been to this in the past would have been the oil crisis of 1973. Although 1973 was essentially little more than a token, geo-political gesture. It lasted barely a fortnight. Finally affected just two oil import terminals, Rotterdam and Genoa. No American, British or other refineries were even targeted. Another relevant contrast; in 1973 the UK had 18 major oil refineries. Today we have just four having lost two of them in the last two years. Whilst is just part of the picture, with a few mitigating factors or contingencies still at play, there is no doubt that the UK and certain other OECD economies are much more exposed than they once were; this time downstream as well.

Dominic Whittome

Dominic Whittome is a energy consultant with a background in economics and econometrics. He has 28 years of experience in the industry principally in the supply, trading and corporate finance spheres. Serving as analyst, commercial manager and head of trading within EDF Energy, ENI UK and Mobil North Sea before he joined Prospect Law and has since specialised in energy purchasing; contract arbitration and commercial development of infrastructural and renewable power projects.

Energy markets are in a state of change. For sound, independent financial advice for your energy project, our team of experienced energy financiers are able to help.

Contact Dominic directly to arrange a call.

Contact Dominic