LONDON – Rising gas prices, which threaten to prop up winter fuel bills, hurt consumption and trigger a near-term spike in inflation, is another blow to the world economy that is on its feet after the coronavirus shock. Coming back.
The gas market chaos, which has pushed prices higher this year by 280 percent in Europe and more than 100 percent in the United States, has been fueled by many factors ranging from low storage levels to carbon prices to slash Russian supplies. factors to blame.
Tensions are so high that several European Parliament lawmakers have called for an investigation into what they said could be market manipulation by Russia’s Gazprom.
Whatever the reasons, the major market implications of this boom are:
Analysts say it is too early to reduce economic growth projections, but the impact on economic activity looks inevitable.
Morgan Stanley believes the impact should be small in the United States, the world’s largest economy. While more than a third of US energy consumption in 2020 was supplied by natural gas, users were primarily industrial, it notes.
Overall though, higher gas prices increase the risk of stagflation – higher inflation, lower growth.
Michael Hewson, chief market analyst at CMC Markets, said: “It is quite clear that there is an increasing sense of unease about the economic outlook as a growing number of companies look to the prospect of rising costs.”
Euro zone wholesale electricity prices are at record highs, potentially adding to inflationary pressures from COVID-19 related supply constraints. In Germany, 310,000 households face an 11.5 percent increase in gas bills, as shown on Monday.
Noting that German factory gate prices were already the highest since 1974, City analysts predicted a 5 percent increase in electricity and gas prices in January, adding 0.25 percentage points to consumer inflation the following year.
Higher food costs are another side effect, given the reduction of carbon dioxide that is used in slaughterhouses and prolongs the shelf life of food. A cut in fertilizer production could also push up food prices.
Goldman Sachs predicts higher oil demand, with risks above $5 a barrel in its fourth quarter 2021, puts the Brent price at $80 a barrel. Brent is currently trading at around $74.
Central banks are sticking to the line that the spike in inflation is temporary—European Central Bank board member Isabel Schnabel said on Monday that she was pleased with the broader increase in inflation.
But as market and consumer-based inflation expectations rise, gas prices will be on the radar of central banks.
“If we have high inflation, transient or structural, and slow growth – this will be a very difficult situation for markets and central banks to assess, navigate and communicate with,” said Pete Hans Christiansen, chief strategist at Danske Bank.
This week’s central bank meeting may test the resolve of policy makers. The Bank of England meeting on Thursday is particularly in focus, given that UK inflation has hit a nine-year high.
Susannah Streeter, senior analyst at Hargreaves Lansdowne, said that with rising UK producer price inflation, shipping costs showing little sign of cooling, commodity prices high and job vacancies rising to 1 million, There is an increasing likelihood that higher prices will persist for a longer period of time.
“If they do, more (BOE) members could move quickly to vote for a rate hike sooner than next year, but it could be an already difficult tax hike for many consumers to digest. would be an unpopular course of action,” he said.
Britain is considering extending state-backed loans to energy firms after large suppliers requested support to cover the cost of taking on customers from companies that were shut down under the influence of gas prices. One firm, Bulb, is reportedly seeking a bailout.
Meanwhile, France plans to make a one-time payment of 100 euros ($118) to millions of households to help with energy bills.
“The story emerging from the UK energy sector will soon be more relevant to the European market than Evergrande,” said Althea Spinozzi, senior fixed income strategist at Saxo Bank.
And in a week filled with central bank meetings, she said the market was “right to fret”.
Spain stunned the utility sector last week by redirecting billions of euros in profits from energy companies to consumers and halting gas price hikes. The revenue hit at Iberdrola and Endesa was estimated by RBC at one billion euros and the companies’ shares were heavily sold.
Morgan Stanley said that since the move, investors have been concerned about infections in other countries. Seeing those fears as overdue, the bank acknowledged there was a risk of margin squeeze in European utilities in the coming months.
Sector stocks fall for the third consecutive week
by Dhara Ranasinghe
This News Originally From – The Epoch Times