Gas price surge, just one more headwind for world economy
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[September 21, 2021] 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.
The gas market chaos, which has driven prices 280% higher in Europe this
year and led to a 100%-plus surge in the United States, is being blamed
on a range of factors from low storage levels to carbon prices to
reduced Russian supplies.
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.
Whatever the causes, the surge carries major market implications:
1/GROWTH
Analysts say it's too early to downgrade economic growth forecasts but a
hit to economic activity looks inevitable.
Morgan Stanley reckons the impact in the United States, the world's
biggest economy, should be small. While over a third of U.S. energy
consumption in 2020 was supplied by natural gas, users were
predominantly industrial, it notes.
Overall though, higher gas prices raise the risk of stagflation - high
inflation, low growth.
"It is quite clear there is a growing sense of unease about the economic
outlook as a growing number of companies look ahead to the prospect of
rising costs," said Michael Hewson, chief market analyst at CMC Markets.
2/INFLATION
Euro zone wholesale power prices are at record highs, potentially
exacerbating inflation pressures inflicted by COVID-related supply
bottlenecks. In Germany, 310,000 households face an 11.5% increase in
gas bills, data showed on Monday.
Noting German factory gate prices were already the highest since 1974,
Citi analysts predicted 5% hikes for electricity and gas prices in
January, adding 0.25 percentage points to consumer inflation next year.
Higher food costs are another side effect, given a shortage of carbon
dioxide which is used in slaughterhouses and to prolong the shelf-life
of food. Cuts in fertiliser production could also lift food prices.
Goldman Sachs predicts higher oil demand, with a $5 per barrel upside
risk to its fourth-quarter 2021 Brent price forecast of $80 a barrel.
Brent is trading at about $74 currently. [O/R]
3/CENTRAL BANKS
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.
But as market- and consumer-based measures of inflation expectations
rise, gas prices will be on central banks' radar.
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Snow covered transfer lines are seen at the Dominion Cove Point
Liquefied Natural Gas (LNG) terminal in Lusby, Maryland March 18,
2014. REUTERS/Gary Cameron
"If we have higher inflation, transitory or structural, and have slower growth -
it will be a very tricky situation for markets and central banks to assess,
navigate and communicate," said Piet Haines Christiansen, chief strategist at
Danske Bank.
This week's central bank meetings could test policymakers' resolve. The Bank of
England meeting on Thursday is in particular focus, given UK inflation has just
hit a nine-year high.
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.
"If they do, more (BoE) members may move quickly to vote for a rate rise sooner
than expected next year, but it would be an unpopular course of action with
looming tax rises already hard to digest for many consumers," she said.
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. One firm, Bulb, is
reportedly seeking a bailout.
France meanwhile plans one-off 100 euro ($118) payments 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 packed with central bank meetings, she added that markets were
"right to fret."
5/COMPANIES
Spain shocked the utility sector last week by redirecting billions of euros in
energy companies' profits to consumers and capping increases in gas prices.
Revenue hits at Iberdrola and Endesa were estimated by RBC at one billion euros
and shares in the companies sold off heavily.
Since the move, investors have fretted about contagion to other countries,
Morgan Stanley said. While seeing those fears as overdone, the bank acknowledged
there was a risk of margin squeezes at European utilities in coming months.
Sector shares are down for the third week straight
(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)
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