Fears of a gas crisis in Britain and Europe are gradually easing, despite the continued closure of the Strait of Hormuz. Prices are returning to levels close to those seen before the war, as market participants bet they can secure sufficient supplies.
In Britain, gas prices, which on March 19 reached a three-year high of 180 pence per therm (€71 per megawatt-hour), have since reversed course and fallen to 104 pence per therm, below January’s peak of 113 pence. Europe has seen a similar pattern: the benchmark price has dropped to €41.35 per MWh (105 pence per therm) after hitting €74 in mid-March.
Traders stress that supply risks remain, and that the fall in prices is largely due to weaker demand in Asia. Even so, the trend could offer some breathing space to policymakers, including Britain’s chancellor, Rachel Reeves.
The IMF warned this week that Britain’s economy would suffer the heaviest blow among major countries from the fallout of the war with Iran—largely because of the country’s heavy reliance on gas for heating.
The yield on Britain’s ten-year government bonds has risen by more than half a percentage point since the start of the conflict, climbing above 4.8%, increasing borrowing costs for a government already facing mounting fiscal pressure, including demands to raise defense spending.
Lower gas prices are “an obvious positive for the government-bond market,” said James Carter, co-head of fixed income at the investment firm W1M. He said they would help “limit the near-term spike in inflation and reduce the risk of second-round effects.”
“This allows the Bank of England to return to its previous path of gradual rate cuts,” he added.
Rachel Reeves said again on Thursday that she regarded the war as a mistake, telling a CNBC forum in Washington: “Our economic growth will be higher, and inflation lower, if this conflict comes to an end.”
According to Cornwall Insight’s latest forecast, released on April 9, the price cap that determines typical household bills will rise by 13% in July, compared with a 20% increase expected in March. A further decline in prices could limit the rise even more.
At that level, average household costs would be £1,861 a year—less than £20 a month above the current level.
Although that increase may still be felt, it is not comparable to the surge that followed Russia’s full-scale invasion of Ukraine, when the government had to cap gas and electricity bills at £2,500 a year after the unsubsidized cap reached £4,059.
The total cost of support at the time was £44 billion, including aid for businesses.
Traders say the recent decline in prices reflects several factors, including a faster-than-expected shift away from gas in Asian countries—in particular, China has increased coal-fired power generation.
That has eased competition for cargoes of liquefied natural gas—the seaborne fuel most exposed to supply cuts from Qatar and the UAE.
“China’s LNG demand has fallen sharply since the start of the conflict,” said Massimo Di Odoardo, head of gas analysis at Wood Mackenzie. He said this was “limiting competition for available spot cargoes and restraining price growth.”
Traders also point out that conditions for European economies are now far more favorable than at the start of the previous energy crisis, when Russia sharply reduced pipeline supplies after invading Ukraine.
Over the past four years, LNG volumes have risen substantially, and before the war with Iran the market had expected an oversupply. Once the conflict began, existing capacity started to increase output.
“Our data show a clear supply response from facilities outside the Middle East in March—they likely increased utilization to take advantage of higher prices,” UBS analysts noted.
At the same time, experts warn that uncertainty remains high. LNG supplies from Qatar, which normally covers about a fifth of global demand, remain outside the global market, and almost 20% of its production could be out of action for years after Iran’s missile strikes last month.
“Many are counting on the situation being resolved within two to three weeks and the Strait of Hormuz reopening,” said Anne-Sophie Corbeau, a former head of gas analysis at BP who now works at Columbia University’s Center on Global Energy Policy. “That is possible, but the likelihood of the opposite is also high.”
Some traders also note that contracts for gas delivery later this year remain slightly above current levels and could rise again if Europe’s gas inventories—which usually build up during the summer—are replenished slowly.
“The market may be in the calm before another surge,” said Craig Lowrey of Cornwall Insight, warning that global supplies could become “increasingly tight.”