The International Energy Agency (IEA) said on Tuesday (September 21) Russia could do more to help alleviate gas supply issues in Europe that have driven prices to record highs over the past month.
The comments come after a group of European Parliament lawmakers last week asked the European Commission to investigate Gazpromin soaring gas prices in Europe.
âThe IEA believes that Russia could do more to increase gas availability in Europe and ensure storage is filled to adequate levels, âhe said in a statement.
European benchmark gas prices have risen by more than 250% this year, leading to higher electricity prices and a ripple effect on industries dependent on gas for their production, such as fertilizer factories.
The high price was caused by a number of factors, such as high demand in Asia and both planned and unanticipated infrastructure issues, but traders said RussiaThe decision not to reserve auction capacity on transit pipelines to Europe has compounded the problem.
‘Based on the information available, Russia fulfills its long-term contracts with its European counterparts – but its exports to Europe are down from their 2019 level, âthe IEA said.
“It is also the occasion for Russia to underline its credentials as a reliable supplier in the European market, âhe said.
Whatever the causes, the push has major implications for the market:
1 / Growth
Analysts say it’s too early to revise economic growth forecasts downwards, but a blow to economic activity seems inevitable.
Morgan Stanley believes the impact to the United States, the world’s largest economy, should be small. While more than a third of U.S. energy consumption in 2020 was supplied by natural gas, users were predominantly industrial, he notes.
Overall, however, higher gas prices increase the risk of stagflation – high inflation, low growth.
“It’s pretty clear that there is a growing sense of unease about the economic outlook as a growing number of companies consider the prospect of rising costs,” said Michael Hewson, chief market analyst at CMC Markets.
2 / Inflation
Wholesale electricity prices in the euro area are reaching record highs, which could exacerbate inflationary pressures inflicted by COVID-related bottlenecks. In Germany, 310,000 households are facing an 11.5% increase in their gas bills, according to data released on Monday.
Noting that German ex-factory prices were already the highest since 1974, Citi analysts predicted a 5% rise in electricity and gas prices in January, adding 0.25 percentage points to inflation at consumption next year.
Rising food costs is another side effect, given the scarcity of carbon dioxide that is used in slaughterhouses and to extend the shelf life of food. Reductions in fertilizer production could also push up food prices.
Goldman Sachs is forecasting an increase in demand for oil, with upside risk of $ 5 per barrel for its Brent price forecast for the fourth quarter of 2021 of $ 80 per barrel. Brent is currently trading at around $ 74.
3 / Central banks
Central banks are sticking to the line that the spike in inflation is temporary – Isabel Schnabel, a member of the board of the European Central Bank, said on Monday that she was satisfied with the widespread rise in l ‘inflation.
But as market-based and consumer-based measures of inflation expectations rise, gas prices will be on central banks’ radar.
“If we have higher inflation, transitional or structural, and slower growth, it will be a very difficult situation for markets and central banks to assess, navigate and communicate,” said Piet Haines Christiansen, strategist in chief at Danske Bank.
This week’s central bank meetings could test the resolve of policymakers. Particularly in the spotlight is the Bank of England meeting on Thursday, given that UK inflation has just hit a nine-year high.
With UK producer price inflation soaring, shipping costs showing little sign of cooling, commodity prices on the rise and vacancies at 1 million, there are more more likely the higher prices will last longer, said Susannah Streeter, senior analyst at Hargreaves Lansdown.
“If they do, more (BoE) members could quickly vote for a rate hike sooner than expected next year, but that would be an unpopular move with impending tax hikes already hard for many consumers to digest. “she said.
4 / State bailouts
Britain is considering offering state-guaranteed loans to energy companies after major suppliers requested support to cover the cost of supporting clients of companies that have gone bankrupt under the impact of gas prices. One company, Bulb, has reportedly called for a bailout.
France is planning one-off payments of â¬ 100 to millions of households to help them pay their energy bills.
âThe story emerging from the UK energy sector will soon be more relevant to the European market than Evergrande,â said Althea Spinozzi, senior fixed income strategist at Saxo Bank.
And in a week filled with central bank meetings, she added that the markets were “right to be concerned.”
5 / Companies
Spain shocked the utilities sector last week by redirecting billions of euros in profits from energy companies to consumers and capping increases in gas prices. Iberdrola and Endesa’s earnings were estimated by RBC at one billion euros, and the companies’ shares were sold off heavily.
Since the move, investors have worried about contagion to other countries, Morgan Stanley said. While considering these fears as exaggerated, the bank acknowledged that there was a risk of squeezing the margins of European public services in the months to come.
The sector’s shares are down for the third week in a row.
The deputy managing director of French gas and electricity group Engie said on Tuesday he was concerned that current gas prices could hold up for the foreseeable future with not very high gas storage levels in Europe.
“We are concerned that the current gas shortage will keep the price high and that our customers will suffer,” Deputy Managing Director Didier Holleaux told reporters on the sidelines of the Gastech conference in Dubai.