Soaring gas prices are threatening to reignite inflation across Europe and could spread next to Asia according to a City analyst.
Low gas stocks, reduced supplies supply from Russia, colder temperatures, lower wind output and strong competition from Asia for liquefied natural gas have all been cited as causes for the current spike in prices.
“This is a big deal,” said George Saravelos at Deutsche Bank (NYSE:DB).
“The importance of these moves on inflation, growth and external accounts are not to be underestimated.”
The price rise is also becoming global with US and Asian prices now all accelerating, he added.
“To put things in context, accounting for relative energy usage in Europe for example, the natural gas price rise seen this year is equivalent to oil trading around $200 per barrel now. These price moves are a big deal.”
Euro-area is one of the biggest losers in the developed world with a current account deterioration potentially approaching 2% of GDP, he estimates.
Beyond Europe, the one region to be watched very closely is Asia, added Saravelos
“The projected negative impact is so far relatively more contained because the rise in natural gas prices is less.
“Asia is also much more reliant on long-term LNG contracts which take years to negotiate.
“But in recent days Asian prices are starting to take off in this region too, while the share of short-term and price-linked contracts has risen substantially in recent years.
“Where Asian prices to follow Europe and stay there, the negative terms of trade impact on places like Japan and Korea would be dramatic, in the order of magnitude of 5% of GDP.
“Clearly, the negative growth and inflation consequences would be big.
“On the flipside, Norway, Russia (and of course Qatar) are the biggest beneficiaries. Norwegian exports would rise by a whopping 30% of GDP in value if current prices are maintained.”
UK gas prices yesterday surged 19.5%, making it the largest daily percentage increase in a year and a 183% rise since August and economists predict if they stay high that will mean sharply higher retail prices generally.
UK’s index-linked bonds are implying that the April 2022 retail price inflation will be around 7%, which Deutsche Bank (NYSE:DB) notes is when Ofgem next updates its utility bill price cap.
Energy prices went up by 12% this month in the latest price cap adjustment to reflect rising wholesale energy prices.
Some experts predict that the next rise would be as much 33%, if the recent surge in prices was passed on, and send the average annual bill above GBP1,700,
Benchmark European natural gas futures also rose by a record 20% to EUR116.02 per megawatt-hour, with yesterday’s rise alone more than the daily price at the start of 2021.
Prices in Europe are up more than six-fold since the start of the year and more than three-fold since the start of July.
“This fresh round of price surges has led to another spike in inflation expectations across multiple countries,” DB said.
Ten-year German inflation-linked bond yields recorded their biggest rise for a year and are now at eight-year highs.
A cold winter across Europe will worsen the crisis predicted economists
Russian President Vladimir Putin this week blamed a poorly-planned rush into green energy for the spike in prices.
“Some people are speculating on climate change issues, some people are underestimating some things, some are starting to cut back on investments in the extractive industries. There needs to be a smooth transition,” he told Reuters.
The EU imported nearly 90% of its natural gas in 2019 with more than 40% of that coming from Russia.
