Pressure for lower bills as gas price falls

Abundance of gas has pushed the UK's wholesale price to a two-year low

Pressure is growing on gas suppliers to cut consumer bills as the wholesale price drops to its lowest level in more than two years and experts predict further falls to come.

Although all the Big Six reduced their prices in the spring, the average combined bill is still only around 4 per cent lower than last year, while wholesale prices have plummeted by half.

Robert Hammond, at Consumer Focus, said: "It's difficult to see how high gas prices can be justified when we have witnessed a sustained fall in wholesale gas prices over the last year."

There is a natural lag between wholesale and retail prices because companies buy gas ahead. But consumers' patience is running out. Joe Malinowki, founder of TheEnergyShop.com, said: "The pressure is building for significant cuts, and though earlier in the year suppliers could say they were still using the expensive stuff bought last year, at some point that will all be used up."

The wholesale price has been falling steadily since February, and last week dropped to its lowest level since April 2007 after a fault in an export pipeline required a surge of gas to be pumped back into the UK. The day-ahead price is still little more than 17p/therm (th), compared with an average of around 25p/th in recent months and nearly 60p/th last summer. "It was a shock to the market that gas could drop so low, and the price still has not totally recovered," Louise Boddy, managing editor at pricing specialist ICIS Heren, said.

The general trend is downwards because supply is markedly outstripping demand. Not only has recession depressed UK gas usage by 6 per cent, according to National Grid, worldwide gas usage is also way off. And as Asian economies reduce their imports of liquefied natural gas (LNG), the three new LNG terminals opened in the UK in the last 12 months are a receptive alternative. Recent massive increases in LNG production in Qatar have also helped to flood the market.

As economic recovery forecasts remain weak, and with Qatar scheduled to bring even more LNG on stream this winter, prices are set to fall even further. "At the moment all the fundamental signals are bearish and it looks like it would take some kind of supply-side shock to push the market back up again," Ms Boddy said.

In the United States, gas prices fell to a seven-year low earlier this month, and there is so much unused capacity that storage facilities are filling up.

But the biggest surprise is that the oil price is going in the opposite direction, doubling since December to hover around the $70 mark. Typically, gas and oil shadow each other because end users can substitute one for the other. But currently oil is trading at more than three times the prices of gas, on an energy-equivalent basis – the largest divergence since the start of the first Gulf War in 1990. James Lord, an international economist at Capital Economics, said: "The fundamentals of the gas market are so overwhelmingly pushing prices downwards that they are overriding the usual arbitrage relationship between oil and gas."

The divergence cannot last indefinitely. In the last month, the first signs of a switch to gas have started to be seen as US gas-powered electricity generation rose by 10 per cent, while oil and coal continued to fall. And speculators are also starting to move in: earlier this month, a hedge fund spent millions on a bet that the US price will triple by January.