Gas price surge threatens bigger bills

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"You have got 85 pence for the winter, it's absolutely absurd."

STIFF COMPETITION

Although most British gas supply contracts are not directly linked to the price of oil, long-term supply contracts in the rest of Europe tend to be.

Whereas before Britain was largely self sufficient, it must now compete for supplies from big producers like Norway. That has made traders add a risk premium for gas to be delivered during the peak demand winter season, as declining North Sea gas production makes it more dependent on imports.

There is a knock-on effect for power prices, as much of Britain's power is generated from gas.

The more bearish analysts say British prices have already risen enough to attract gas from Europe this winter.

"European gas prices will go up but they won't go up anywhere near that much. Sooner or later gravity will reassert itself and it will all come crashing down," Trimble said.

Trimble estimates that oil CLc1 at $115 a barrel would price Continental European gas contracts at around 65-68 pence for the fourth quarter of this year. In late April, Q4 contracts traded above 82 pence, although prices have since come down.

"The forward market looks overcooked where it is at the moment. But you can see why there is a lack of sellers, why people aren't willing to take risks," said Mark Daubney, head of market reports at energy consultants John Hall Associates.

"The gas may fail to flow again at the required levels. We haven't got the storage that the rest of Europe has as a security blanket. If the gas flows this winter, that will soften prices but until that happens and it's proven then there's obviously a risk premium built into it."

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