How to trade the energy crisis

Gas prices surge

Wholesale gas prices have surged 250% this year and 70% since August owing to a combination of both supply and demand factors. 

Russian supply bottlenecks, a lack of wind in the North Sea, rising Asian demand, in addition to the closure of several platforms in the North Sea and low natural gas stores have all played a part. These factors have come as Europe heads towards winter, a period when demand typically spikes for heating in homes, industry and generating power and as economies are reopening post pandemic, raising demand further.  

High demand and low supply are sending natural gas prices spiking higher. 

The pick up in US natural gas hasn't been acute but the trend is still clear.

Impact near term – big energy firms benefit 

The immediate impact of the price surge is on smaller energy firms. These are less likely to have hedged, which allows firms to manage costs over the long term. Instead, these firms buy at the spot rate meaning that they are incurring huge losses as they are likely unable to pass the increase on to their customers. 

The UK had around 70 energy suppliers in 2018. This had fallen to around 40. So far nine suppliers have gone bust this year and six have folded this month alone. More could well follow shortly.  

Larger firms could be offered state backed loans for taking on customers from smaller suppliers. This is good news for the big energy firms. By tidying up the mess of the small companies in the energy market these large energy firms can expect to re-establish a healthy profit from these same customers in years to come. Furthermore, competition is reduced, bad news for the customer good news for the big energy players. 

SSE one of the big players in the UK energy market has see its price rise as the smaller players collapse. 

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Where next for SSE share price?

SSE has been trending higher since early March, it trades above its 50 & 100 sma and is approaching the key 1700p level, the all time high which was reached pre-pandemic in February 2020, and previous to that in 2015 and January 2008. The RSI suggests that there could be more upside to come, although 1700p could be a tough level to break. It would take a move below 1590p to negate the near term uptrend and a move below 1450p for the sellers to gain traction. 

Endesa plunges

Interestingly for Spain’s Endesa, the outcome has been opposite. The share price plunged on Monday after the government took measures to protect consumers by capping increases in gas prices and redirecting the company’s profits. 

Rising energy prices & the Pound 

Should the rise in gas prices be sustained the current situation has the potential to evolve into a full-blown energy crisis which has implications for the British economy and the Pound.  

Higher natural gas imports could widen the UK’s trade deficit. According to Deutsche Bank, UK gas imports from Norway passed the UK own’s domestic production. The recent rise in the commodity price is likely to go some way to explaining GBP/NOK’s steep decline over the past month. 

Elevated energy prices mean higher bills which will push up inflation. As underlying costs rise not only households but also businesses, shops and manufacturers will see prices climb, threatening consumer confidence and the economic recovery. 

CPI is already at 3.2% its highest level in over a decade. The BoE sees inflation rising to 4% by the end of the year but cooling next year. Usually, higher inflation prompts the likelihood of the central bank raising intertest rates which would be Pound supportive. 

However, an energy crunch is a supply side constraint which has a negative impact on the Pound and is likely overshadow expectations of the rates market. Particularly given that rising energy prices could quickly dampen the economic recovery raising the risk of stagflation. 

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