Energy prices are heating up again

Just when you hoped the energy crisis was over, gas and electricity prices are due to rise by 10% in England, Scotland, and Wales from October. This is due to Ofgem increasing the energy price cap.

To make matters worse, up to 10 million pensioners are expected to no longer qualify for further winter fuel payments.

Energy costs, notably natural gas, have been slowly rising through 2024. As a result, energy prices are likely to remain relatively high throughout 2024 and into next year. Although, it is unlikely that we will see further ‘exceptional’ increases from here, as we suffered in 2022.

Encouragingly, overall demand for gas in the UK continued to fall in 2023, down 10% on 2022. Consumption was at the lowest level since 1992. Natural gas makes up 36% of total energy demand.

To fill the gap in UK North Sea production and Russian natural gas supplies, liquefied natural gas (LNG) has become an important source of energy. Last year’s mild winter helped European households and businesses, but gas demand, whilst it has been consistently falling since mid-2022, is likely to remain material. Ukraine’s recent invasion of the Kursk region has already raised questions about the Sudzha gas hub that supplies around 40 million cubic meters of gas a day to parts of Europe. Meanwhile, although the Chinese economy remains weak, China was the world’s largest LNG importing country in 2023 and Asian demand for LNG is expected to grow. While good news for LNG exporters such as the US, Qatar, and Australia, it is not such good news for the UK, which remains a material consumer of LNG.

Global energy consumption growth accelerated in 2023, due to increased demand from emerging economies. While demand is unlikely to weaken, we expect there to be substantial shifts in the sources of energy supply. BP recently announced, it expects global oil demand to peak next year as wind and solar capacity is set to grow rapidly. Although demand for natural gas looks set to continue to grow. How quickly can non-fossil fuel energy supplies fill the void and provide a sustainable alternative to avoid the lights going out?

What have we been watching?

Markets focused on AI chipmaker Nvidia’s results, US GDP numbers and the latest inflation data. Shares in Nvidia dropped 6% despite more than doubling its sales, but then again, expectations were sky-high! However, Nvidia did confirm earlier reports that it was facing difficulties in producing its new Blackwell AI chips. This news spilled over into Asian chip makers that supply Nvidia. At least this was countered by encouraging US economic growth for the second quarter, albeit the slightly better than expected data may lead the Federal Reserve (Fed) to ease up on the pace of interest rate cuts – perhaps 0.25% rather than 0.5%? The 10-year US Treasury yield nudged up towards 3.9%. The week ended with encouraging inflation data from the US and Europe.

There was a reminder for politicians of the challenges from immigration. German chancellor Olaf Scholz’s ruling coalition, suffered defeats in two regional elections by populist parties on the right and left, dealing a blow to the unpopular government. The far-right AfD party won a state ballot for the first time.

The situation in the Middle East continues to escalate as Israel’s military began a ‘counter-terrorism operation’ in the occupied West Bank.

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In the UK, Sir Keir Starmer warned of a ‘painful’ budget in October, which pushed the 10-year gilt yield higher to around 4% on concerns that greater public debt issuance may also be required. He said ‘those with the broadest shoulders should bear the heavier burden.’ Fears of a rise in capital gains tax is reported to be driving a ‘frenzy’ of activity by business owners, property investors and shareholders. Might we also see business sectors such as banks – businesses with broad shoulders – hit by a windfall tax to fill the ‘black hole?’ Fuel duty is likely to be increased, which would not be good news for white van man. We are probably at peak ‘woe is us/blame the Conservatives’ from the new Labour Government and this all appears to be about expectation management ahead of the Budget.

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German inflation came in below expectation in August at 1.9%, down from 2.3% the previous month and below the European Central Bank’s (ECB) target. However, core inflation, excluding food and energy, was 2.8% while service sector inflation was 3.9%.  This was then followed by inflation data for the Eurozone which dropped to 2.2% in August.

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In the US, economic growth was better than expected in the second quarter of 2024, with GDP +3%. The July inflation numbers were marginally softer than expected. Headline inflation was steady at 2.5% while core inflation remained at 2.6%. However, service inflation moderated slightly to 3.7%.

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Japanese manufacturing activity stabilised in August with a slight improvement to 49.8, although firms seemed more confident about the outlook. Meanwhile, Japanese inflation was a bit higher than expected in August at 2.6%.    

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Chinese manufacturing activity contracted for a fourth straight month in August, while the slump in new home prices deepened.

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Brent oil drifted back to $77 on concerns about global demand.

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Finally, Elon Musk called him ‘two-tier Keir’ but should the new PM be Sir Keir, ‘the chopper.’ The PM has scrapped a government helicopter contract worth £40m as part of its attempt to ‘get to grips with the public finances’. The BBC reported that Rishi Sunak had used helicopters for domestic flights more frequently than the previous three prime ministers.

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Read Last Week’s Alpha Bites – An AI sized elephant in the room

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.