What is happening in the natural gas markets is extraordinary, and it could create serious human hardship. On that we can all agree. Here is how natural gas futures in the U.K. (FN on the chart), Germany (LYA) and the U.S. (NG) have moved over the last five years:
And here is how U.K. natural gas futures moved in the first three days of this week:
Such things don’t happen often. And while natural gas has seen the most extreme moves, the trend of suddenly rising energy prices goes further. This is how Europe’s most widely traded forward contract for coal has traded since the beginning of the financial crisis 14 years ago:
Two questions now matter. First, how did this happen (and therefore, how might the situation be resolved)? And second, what could be the contagion effects for the economy and for global markets?
What Happened?
One part of the problem is that the EU (and the U.K.) did a poor job of storing gas in advance, as this chart from BofA Securities Inc. shows:
The answer has surprisingly little to do with the pandemic, and in Britain (as the problems elsewhere make clear), Brexit has been little more than an aggravating factor. 