Unfolding news in the Middle East continued to dominate the UK energy markets this week. When crude oil prices broke through $100bbl at the start of the month, the impact was noticeable on UK gas prices and power prices in turn. This is partly due to the potential impact on LNG supplies into the UK (while the perceived risk is small at the moment, unrest could disrupt supplies through the Suez Canal forcing longer journey times for LNG cargoes). There is also a direct relationship between oil and gas with a number of large volume gas contracts into the UK indexed to oil. These contracts have some flexibility in terms of contractual volumes delivered (Take or Pay) allowing buyers to go to the gas market for supplies to top up their requirements. The resultant impact of this activity has helped widen the spread between Summer 11 and Winter 11 (currently at 9.8p/therm versus 7.05p/therm at start of month). Summer prices themselves remain strong when compared to UK Power and historical levels. The result is that the clean spark spread (the rate achieved when converting gas into power) has reached historic lows leading to the unusual position of coal fired generation looking more profitable than gas for this coming summer. The market is watching the Middle East closely. The market will react if any changes are seen in the current political situation.