Gas price surge, just one more headwind for world economy By Reuters
By Dhara Ranasinghe
LONDON (Reuters) – Soaring gas prices that threaten to push up winter fuel bills, hurt consumption and exacerbate a near-term spike in inflation are another blow to a world economy just getting back on its feet after the coronavirus shock.
Low storage levels, reduced Russian supply, and carbon prices are all blamed for the gas market turmoil that has seen prices rise by 280% in Europe, as well as a surge of over 100% in the United States.
For a graphic on Gas prices soar this year:
So high are tensions that several European Parliament lawmakers have demanded an investigation into what they said could be market manipulation by Russia’s Gazprom (MCX:).
Whatever the causes, the surge carries major market implications:
Analysts say it’s too early to downgrade economic growth forecasts but a hit to economic activity looks inevitable.
Morgan Stanley (NYSE:) reckons the impact in the United States, the world’s biggest economy, should be small. It notes that while more than a third U.S. energy consumed in 2020 came from, the majority of users were primarily industrial.
However, rising gas prices increase the chance of stagflation, which is high inflation and low growth.
Michael Hewson chief market analyst, CMC Markets said that there’s a rising sense of anxiety about the economy as more companies see the possibility of higher costs.
Euro zone wholesale power prices are at record highs, potentially exacerbating inflation pressures inflicted by COVID-related supply bottlenecks. Data from Monday showed that 310,000 German households will see an 11.5% rise in their gas bills.
Citi analysts forecasted a 5% increase in electricity and gas prices for January. The rises were due to the fact that factory gate prices had been at an all-time high since 1974.
Due to a lack of carbon dioxide, which is needed in the slaughterhouses as well as for food preservation and prolonging shelf life of foodstuffs, higher food prices are another consequence. Reduced fertiliser production may also lead to higher food prices.
Goldman Sachs (NYSE:) predicts higher oil demand, with a $5 per barrel upside risk to its fourth-quarter 2021 price forecast of $80 a barrel. Brent currently trades at $74. [O/R]
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Central banks are sticking with the line that the spike in inflation is temporary — European Central Bank board member Isabel Schnabel said on Monday she was happy with the broad-based rise in inflation.
Gas prices will remain on the radar of central banks as they monitor inflation expectations based on market and consumer factors.
Piet Haines Christianen, the chief strategist of Danske Bank, stated that higher inflation (whether it is structural or transitory) and slower growth will make it difficult for central banks and markets to evaluate, navigate, and communicate.
For a graphic on inflation expectations:
This week’s central bank meetings could test policymakers’ resolve. Due to the fact that UK inflation is at its highest point in nine years, Thursday’s Bank of England meeting will be of special importance.
With UK producer price inflation soaring, shipping costs showing little sign of cooling, commodity prices higher up and job vacancies tipping 1 million, there is a growing chance that higher prices will stick around for longer, said Susannah Streeter, senior analyst at Hargreaves Lansdown (LON:).
According to Streeter, “If they do, some (BoE members) may quickly vote for a rate increase sooner than predicted next year. However, this would not be a popular course of action due to the looming tax hikes that are already difficult to digest for many consumers.”
4/ STATE BAILOUTS
Britain is considering offering state-backed loans to energy firms after big suppliers requested support to cover the cost of taking on customers from companies that went bust under the impact of gas prices. Bulb is one of the firms that are requesting a bailout.
France is reportedly planning to send 100 Euro ($118) in one-off payments to billions of homes to cover their energy bills.
Althea spinozzi, senior fixed-income strategist at Saxo Bank said: “The story emerging in the UK’s energy sector will soon become more relevant to Europe than Evergrande.”
In a week filled with meetings at central banks, she said that the markets are “right to worry.”
Spain shocked the utility sector last week by redirecting billions of euros in energy companies’ profits to consumers and capping increases in gas prices. RBC estimated that Endesa and Iberdrola had lost one billion euros in revenue. Shares were also sold.
Morgan Stanley reported that investors worried about spreading the virus to other countries since the decision was made. Morgan Stanley said that while these fears were overblown, it acknowledged the possibility of margin cuts at European utilities in the coming months.
Sector shares are down for the third week straight
For a graphic on Gas sector turmoil a headwind for European stocks: