The fall in gas prices predicted by Goldman Sachs (NYSE:GS) today could bring an unexpected windfall for the UK government just when it needs it most but households are unlikely to reap the benefits just yet.
The US investment bank forecast a 30% slump in natural gas prices in the coming months as mild weather and a rush of supplies help to ease fears about a winter crisis.
Benchmark European prices are predicted to fall to €85 per megawatt-hour in the first quarter of 2023, down from current levels of around €120.
But it was not all good news with the Wall Street bank suggesting prices could pick up again next summer.
“Our commodity team forecasts a further decline to €85 euros in the first quarter before sharply picking up into next summer as storage levels are rebuilt” it said forecasting a surge in prices to just below €250 per megawatt hour by the end of July.
A further dip in wholesale prices could also help to bring down energy bills, offering relief to squeezed households and businesses although these benefits may be seen further down the line.
Dr Craig Lowrey, data analyst at Cornwall Insight explained any decline in spot prices will unlikely have a material impact on household bills just yet: “Due to the nature of the implied hedging process, any decline in spot prices would be unlikely to have a material impact.”
“This is because we would assume that suppliers would have hedged their consumers’ demand requirements well in advance of this winter.”
However, the main beneficiary could be the Treasury with a double whammy of lower inflationary pressures and a reduced cost of its energy price guarantee (EPG).
Any reduction in prices going forward would help the Bank of England in its fight against soaring inflation, which is already forecast to have peaked in October, which would also ease the pressure for higher interest rates.
It would also provide a financial boost to the government’s finances lowering, or even eliminating, the cost of the EPG, according to some recent analysis.
The government based the cost of the EPG on an estimated wholesale spot gas prices of 600p/therm in December and NatWest (LON:NWG) Markets calculated that at a spot price of around 300p/therm the cost of the scheme could be eliminated entirely.
As the chart below illustrates this level has been reached meaning if this analysis is correct the EPG has become cost free.
UK natural gas for Dec. delivery has fallen through the crucial 300p/therm level. Analysis from NatWest suggests this is the level the Government's Energy Price Guarantee becomes cost-free. $GBP pic.twitter.com/b8v9iHVnmD— Pound Sterling Live (@thepoundlive) November 1, 2022
Of course the volatile and unpredictable nature of energy prices means upside risks are also huge and any unexpected surge in gas prices would throw the UK's finances into disarray again.
But falling prices mean the opposite and while chancellor, Jeremy Hunt, won’t be banking on it just yet there may yet be some gold at the end of the rainbow.