How to trade the energy crisis?

Wholesale gas prices have surged this year. This article looks at markets to trade amid the energy crisis. Smaller energy companies are collapsing, for the big players in the UK energy market this appears to be an opportunity. GBP/NOK has tumbled sharply as Norwegian gas imports surpass the UK's domestic production.

Downtrend 5

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. 

Learn more about trading equities

Where next for SSE share price?

SSE chart 

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. 

Learn more about the Pound

How to trade with City Index

Follow these easy steps to start trading with City Index today:

  1. Open a City Index account, or log-in if you’re already a customer.
  2. Search for the market you want to trade in our award-winning platform.
  3. Choose your position and size, and your stop and limit levels
  4. Place the trade.


More from Equities

Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.