From Dhara Ranasinghe
LONDON, Sept. 20 (Reuters) – Soaring gas prices, which threaten to skyrocket winter fuel bills, hurt consumption and worsen a short-term spike in inflation, are another blow to a global economy in the wake of the coronavirus shock just getting back on her feet.
The chaos in the gas market, which has driven prices up 280% in Europe this year and more than 100% in the US, is attributed to a number of factors, from low inventory levels to carbon dioxide. Prices up to lower Russian deliveries.
The tension is so great that several legislators in the European Parliament have called for an investigation into the alleged market manipulation by Russian Gazprom.
Whatever the causes, the surge has a significant impact on the market:
1 / GROWTH
Analysts say it is too early to downgrade economic growth forecasts, but a slowdown in economic activity seems 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 covered by natural gas, consumers are mostly industrial, it is said.
Overall, however, higher gas prices increase the risk of stagflation – high inflation, low growth.
“It is clear that unease about the economic outlook grows as more companies face rising costs,” said Michael Hewson, chief market analyst for CMC Markets.
2 / INFLATION
Wholesale electricity prices in the eurozone are at record highs, potentially exacerbating inflationary pressures from COVID-related supply bottlenecks. In Germany, 310,000 households are faced with an 11.5% increase in gas bills, data on Monday showed.
Given that German factory gate prices were already their highest since 1974, Citi analysts predicted a 5% increase in electricity and gas prices in January, adding 0.25 percentage points to consumer inflation next year.
Higher food costs are another side effect as carbon dioxide used in slaughterhouses becomes scarce and the shelf life of food is extended. Cuts in fertilizer production could also raise food prices.
The story goes on
Goldman Sachs predicts higher oil demand with an upside risk of $ 5 a barrel for its Brent price forecast for the fourth quarter of 2021 of $ 80 a barrel. Brent is currently trading at around $ 74.
3 / CENTRAL BANKS
Central banks are sticking to the line that the rise in inflation is temporary – Isabel Schnabel, board member of the European Central Bank, said on Monday she was satisfied with the broad-based rise in inflation.
However, as market- and consumer-based measures of inflation expectations rise, gas prices will be on the radar of central banks.
“When we have higher inflation, temporary or structural, and slower growth, it will be a very difficult situation for markets and central banks to evaluate, navigate and communicate,” said Piet Haines Christiansen, chief strategist at Danske Bank.
This week’s central bank meetings could test the determination of policy makers. The Bank of England meeting on Thursday takes center stage as UK inflation has just hit a nine-year high.
With soaring producer price inflation in the UK, little sign of a cooling off in shipping costs, higher commodity prices and 1 million job vacancies, there is a growing chance that higher prices will last longer, said Susannah Streeter, senior analyst at Hargreaves Lansdown.
“If so, more (BoE) members could vote for a rate hike sooner than expected, but that would be an unpopular course of action as the impending tax hikes are already hard to digest for many consumers,” she said.
4 / STATE BAILOUTS
The UK is considering offering government-backed loans to energy companies after major suppliers sought assistance to help meet the cost of taking over customers from companies that went bankrupt under the impact of gas prices. One company, Bulb, is reportedly seeking a bailout.
France, meanwhile, is planning one-off payments of € 100 (118) to millions of households to help with electricity bills.
“The history of 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 of central bank meetings, she added that the markets were “really worried”.
5 / COMPANY
Spain shocked the utility sector last week by diverting billions of euros in energy company profits to consumers and capping the rise in gas prices. The sales losses at Iberdrola and Endesa were estimated by RBC at one billion euros and shares in the companies were sold off sharply.
Since the move, investors have been concerned about contagion in other countries, Morgan Stanley said. The bank viewed these fears as exaggerated, but admitted that there was a risk of margin squeezes among European utilities in the coming months.
Sector stocks fell for the third straight week
(Reporting by Dhara Ranasinghe; graphics by Saikat Chatterjee and Dhara Ranasinghe; additional reporting by Yoruk Bahceli and Sujata Rao; editing by Sujata Rao and Hugh Lawson)