Today’s Gas Glut and Yesterday’s Contracts: The British Gas Predicament

In the frst half of 1995 the UK gas market underwent a price shock. At the beginning of the year gas had been trading on a short-term basis in an informal telephone market at a level of around 18- 19p/therm. This was approximately in line with the average long-tenn contract prices paid by British Gas (BG) and other wholesale gas purchasers and which account for the overwhelming proportion of sales. On a calorific basis these price levels were also comparable with oil prices in the range of $15-18 barrel. By March the price for short-term – or “spot” – supply had weakened to around 14p and in April prices collapsed to 9p. In term of the percentage decline in price the fall can be compared to the collapse in oil prices of 1986. A supply surplus had been foreseen by the industry and consequently a weakening of prices had been expected, but the scale and speed of this price movement appear to have caught many commentators and market participants by surprise.

By: M. Stoppard

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