Household energy bills could rise back to crisis-era levels if disruption to gas supplies continues in the Middle East after wholesale prices surged amid military escalation between Iran, Israel and the United States.
Analysts warned that annual bills could rise to around £2,500 if global gas markets remain unstable for longer, erasing recent relief for consumers and reviving memories of the energy shock following Russia’s invasion of Ukraine.
Britain’s benchmark wholesale gas price NBP rose as much as 54 percent to 122 pence per therm after QatarEnergy halted production of liquefied natural gas (LNG) following attacks on its Ras Laffan and Mesaieed plants. Brent crude oil also rose sharply, trading around 9 percent higher at $79.40 per barrel.
Qatar is the world’s second-largest LNG exporter after the United States and, together with the United Arab Emirates, accounts for about a fifth of the world’s LNG supply. Much of that gas passes through the Strait of Hormuz, a narrow but important shipping channel that connects the Gulf to global markets.
Shipping through the strait has largely come to a standstill after Iran reportedly attacked tankers in retaliation for U.S. and Israeli attacks that killed Ayatollah Ali Khamenei, Iran’s supreme leader. The strait is a major bottleneck not only for LNG but also for oil, and any permanent closure risks triggering a broader energy supply crisis.
Although most LNG cargoes from Qatar go east to major buyers such as China and India, disruptions there would increase global competition for alternative supplies and drive up prices in Europe and Britain. The European and UK gas markets tend to move in parallel as they are linked by pipeline infrastructure.
Tom Marzec-Manser, director of European gas and LNG at consultancy Wood Mackenzie, said the scale of potential disruption explains the market reaction. “The prospect of around 20 percent of global LNG being cut off from the market has unsurprisingly led to a sharp rise in prices. The key question now is how long the strait will remain closed. The longer it takes to reopen, the higher prices are likely to be.”
Europe relies on LNG for around a quarter of its gas consumption and, after a cold winter, started the current period with lower supplies than usual. Analysts at Stifel warned that gas prices in Europe could triple and potentially return to levels above 100 euros per megawatt hour if supplies from Qatar and the Emirates are restricted for an extended period. In the UK this could equate to wholesale prices of around 250p per therm.
Stifel analyst Chris Wheaton said such a scenario would reflect price increases in 2022. “If LNG production from Qatar and the United Arab Emirates were disrupted for more than six weeks or efforts to keep shipping lanes open failed, prices could triple from pre-attack levels.”
Under these conditions, the UK’s energy price cap could rise sharply when Ofgem next updates it. The current cap is £1,641 per year for a typical household. A sustained wholesale price of 250p per therm could raise the cap to around £2,500 a year, Stifel estimates.
This would more than wipe out the £117 cut in average household energy bills that is due to come into effect in April under changes announced in the Chancellor’s Budget.
Dr. Craig Lowrey, principal adviser at Cornwall Insight, said the UK remained exposed to global market volatility. “The UK’s reliance on international gas markets means that wholesale movements are fed directly into domestic bills. The April to June cap is already set, so there is no immediate impact. However, the July to September cap is calculated using average wholesale prices over a three-month period. If prices remain high, consumers will feel the impact later in the year.”
The situation has raised concerns that recent forecasts of easing inflation could prove optimistic. Higher energy costs are adding to price pressures and potentially complicating decisions by the Bank of England, which was expected to consider further interest rate cuts.
The development of the budget bills initially depends on how long tensions in the Middle East last and whether the energy infrastructure or shipping routes are permanently disrupted. Markets remain sensitive to developments and traders are watching the Strait of Hormuz as the next critical indicator of how severe and long-lasting the energy shock could become.
