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What drives the energy markets?

Below are some of the key drivers affecting energy prices and constantly under review by our Market Intelligence Team:

Supply and demand

Taking oil as an example if oil supply increaes but demand remains stable, the price of oil will decrease. If more people are using oil but oil production does not increase to match the increase in demand, the price of oil will increase. In recent times, decommissioning of a number of UK power stations will reduce spare generation capacity to just a few percent, and this has already been supportive of higher UK electricity prices.


Link between oil and gas prices

More than 90 percent of gas pricing in continental Europe is indexed to heavy and light fuel oil so UK wholesale gas prices to a large extent rise and fall on the back of oil. Another factor is that oil and gas are substitute fuels for one another – as oil becomes expensive, many industrial energy users can switch to gas and vice versa, so oil and gas prices are likely to continue to rise and fall together.


Link between the US Dollar and commodity/energy prices

 Oil is priced in US Dollars, and generally moves inversely to that currency. A rising dollar applies downward pressure on oil prices. A falling dollar usually applies upward pressure on oil prices.


Economic and political factors

 Economic events can affect the levels of energy prices. For example, political unrest in the Middle East can cause the price of oil to increase due to uncertainties in oil supply. Economic growth can result in higher energy consumption, and also movement of investor funds from the safe haven US Dollar to the world stock markets, weakening the US Dollar, both of  which factors are supportive of higher commodity prices, whilst an economic crisis, such as recently occurred in Greece and Cyprus can result in the flight of investor funds into the safe haven US dollar, which can result in softening energy prices.



 Energy prices can be affected by weather. Mild Winter weather will result in lower energy use, causing a reduction in the energy use and in the cost of energy. The converse applies. Sometimes weather systems can threaten oil supply - for example, when hurricanes track through the oil rich Gulf of Mexico.


Inflation and commodity prices

 Oil and Natural Gas are commodities, and investers can use commodities as a natural hedge against inflation. If rapid inflation seems imminent, commodity prices may increase because investers will move money out of investments that don’t offer  some protection against inflation and into those that do - such as the commodity markets


We use Twitter extensively to provide a narrative of the events impacting on UK energy prices. Find out how we use Twitter


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