Within a whisker

On the 8^th of January, during the bitterly cold weather spell, the UK’s energy grid came ‘within a whisker’ of blackouts, with one energy consultant saying it was the tightest day for the UK’s electricity market since 2011. Ironically, ahead of Storm Éowyn, on January 22^nd, near-zero wind speeds saw wind power collapse to less than 1% of the power output.

National Grid data showed that more than half of the UK’s power on both these days was generated by natural gas. Centrica, which owns British Gas has warned about ‘concerningly low’ gas storage levels. The UK typically holds about 12 days of gas supply, but this compares with 89 days in Germany and 103 in France. Centrica partly reopened the large Rough gas storage facility off the coast of Yorkshire in 2022, but has suggested it may close it again as it is loss-making.

The biggest driver of UK electricity prices is the marginal pricing model. The cost of generating electricity is different for each supplier and so the price the network pays and then passes onto consumers, is set by the most expensive of the electricity suppliers that is required to ensure all the demand is met. When the sun doesn’t shine or the wind doesn’t blow, this means gas. UK demand for electricity will grow whether it’s from more homes being built, AI, EVs, or heat pumps.

The Ukraine/Russian war energy shock was the spark for the ‘cost-of-living’ crisis and a reminder that the UK needs a strategic gas reserve to protect households from future price spikes. European natural gas prices recently hit a 12-month high, following freezing temperatures. This comes as the European Commission is planning to extend its target mandate of 90% gas storage capacity for EU member states for another year. Norwegian energy giant Equinor has warned gas prices could rise next winter as European gas storage levels are lower than this time last year.

Meanwhile, Poland has said gas flows from Russia to Western Europe should never be restored, even if Russia and Ukraine reach a peace deal. Against this, Donald Trump wants to sell Europe more gas and is using trade tariffs as a lever to achieve this goal, but can the US gas industry ramp up production quickly enough? Ed Miliband is pushing ahead with the shift to renewables, but the recent cold spell should be a wake-up call that the UK is still exposed to extreme weather and gas prices. The government’s latest plan is to build nuclear SMRs, but these will not be operational until 2032!

Why does this matter? The Bank of England is forecasting inflation will rise to 3.7% by the summer due to higher energy prices!

 

What have we been watching?

 

An even more unpredictable Trump 2.0 is reflected in his takeover plan for Gaza and his tariff bullying! The uncertainty has seen gold hit a new high while the US 10-year Treasury yield has dropped back below 4.5%. Trump’s takeover proposal for Gaza has been condemned by US allies across the world. What message does his shock announcement send to Putin regarding Ukraine and China’s ambitions concerning Taiwan?

Meanwhile, markets continue to face the uncertainty of Trump tariffs and the possibility of trade wars. Trump tariffs are not new news but investors were initially caught out as they believed that ‘offenders’ would be given time to negotiate and to agree on a deal, whether it was to buy more US gas or defence equipment or tackle immigration issues, before being clobbered. Trump 2.0 has decided to impose tariffs and talk later. However, markets then breathed a sigh of relief, as a deal was done before midnight with Canada, following one with Mexico earlier in the day to defer tariffs for at least one month. Not so with China, however, which has reacted with some measured tariffs of its own. These include a 15% tariff on US LNG and coal as well as 10% on oil, agricultural machinery, and pickup trucks. The possible imposition of tariffs against Canada, Mexico and China is also a ‘shot across the bows’ for the EU and UK. The EU is reported to be planning to hit big US tech companies with an ‘anti-coercion instrument’ if Trump pulls the trigger on European tariffs. However, this EU ‘bazooka’ would risk dragging the service sector into a trade war alongside manufacturing. Over the weekend, Trump imposed a 25% tariff on steel and aluminium imports and has warned of reciprocal tariffs on all countries that tax imports from the US later this week. ‘If they charge us, we charge them.’

Trump continues to exert pressure on countries beyond tariffs. Panama has withdrawn from China’s ‘Belt & Road Initiative.’ This follows a visit by new US Secretary of State Marco Rubio, during which it was made clear that the US would take necessary measures to protect its rights under the treaty that handed back the Panama Canal in 1999. However, Panama has denied US State Department claims that it is making changes to allow US government vessels to transit the Panama Canal for free.

Trump said he had spoken to Putin about ending the war in Ukraine, albeit there is no further information than that at this stage.

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In the UK, as widely expected, the Bank of England (BoE) cut interest rates by 0.25% to 4.5%. The vote was 7-2 which surprised markets as these two members wanted a 0.5% cut. However, there was bad news for Chancellor Rachel Reeves as the BoE cut its 2025 UK economic growth from 1.5% to 0.75% while it expects inflation to peak at 3.7% in the summer, driven by energy costs, before falling again. In another blow for the government, UK construction activity slumped for the fourth month in a row in January. This is not very encouraging as the OBR report looms large on 26^th March. The OBR growth forecast is 2%, whereas most estimates of UK economic growth in 2025 are currently less than 1%. More spending cuts and tax hikes beckon?

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In the US, non-farm payrolls were weaker than expected in January, while a survey from the University of Michigan showed that consumer sentiment dropped unexpectedly in February to hit a seven-month low.

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China’s CPI inflation picked up to 0.5% in January, the fastest rise in five months, but producer prices fell for the twenty-eighth consecutive month, dropping by 2.8%.

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Brent oil dropped to $75 as the risk of a global trade war continued to overshadow markets.

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Finally, talking of tariff uncertainty, an example of just what one UK company is possibly facing. Diageo produces a wide range of drinks from Guinness and Scotch whisky to tequila. For its US operation, 45% of sales come from products made in Canada and Mexico, with up to 65% of US sales imported. Management expects a potential $200m adverse profit hit, with 85% of that from tequila. While management is taking mitigating actions on inventory and pricing, if Trump does impose tariffs, it sounds as if they might be in need of a stiff drink.

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Read Last Week’s Alpha Bites – DeepSeek – AI’s Sputnik moment?

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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.