Iran war fuels fears of European energy inflation shock
The energy price shock that followed Russia’s invasion of Ukraine four years ago remains fresh in the minds of European policymakers as the conflict in Iran sends oil and gas prices soaring once again. However, experts think the situation may be different this time.
Fears of a full-blown energy crisis on this scale may yet be exaggerated, according to investment strategists, with oil rising above $120 per barrel by June 2022, gas prices soaring, household energy bills soaring and inflation in the eurozone reaching a record 9%.
Brent crude oilWith the International Energy Agency agreeing on Wednesday to release a record 400 million barrels of oil from emergency reserves, oil, the global oil benchmark, retreated from near $120 per barrel seen earlier in the week. European natural gas prices were measured as follows: Dutch TTF futures The indicator has also retreated from a three-year high of 63.77 euros per megawatt-hour and was last seen below 50 euros per MWh on Wednesday.
‘Eerily familiar’
James Smith, a developed markets economist focusing on the UK at ING, said that while the initial energy price reaction seemed “eerily familiar” to the start of the Ukraine invasion, the global economic picture looked very different from the 2022 shock.
“The 2022 energy crisis hit a global economy ripe for inflation to soar. Supply chains were broken, labor markets were tight, and fiscal policy was adding fuel to the fire. All of these, to varying degrees, are less true today,” Smith wrote in a note. he said.
Brent crude oil.
Analysts say the impact on Europe’s inflation trajectory depends on the duration of the conflict.
The ongoing closure of Qatar’s liquefied natural gas (LNG) production, which accounts for almost a fifth of global LNG supply, and Attacks on ships in and near the critical Strait of Hormuz could cause oil and gas stocks in Europe to deteriorate for longer periods of time.
Qatar has emerged as a major source of LNG supplies to Europe since the invasion of Ukraine, reducing Russia’s dependence on pipeline supplies.
Michael Lewis, CEO of German multinational energy supplier UniperHe said the company had “cut off ties” from Russian gas since the Ukraine invasion and had diversified its sources through LNG and pipelines from Norway, the US, Canada, Australia and Azerbaijan.
“We didn’t want to repeat the difficulties in the past that were tied to a single source, which was Gazprom,” Lewis told CNBC’s “Squawk Box Europe” on Wednesday. he said.
However, he also acknowledged that Europe does not produce enough gas to meet its energy needs.
“What we need to do is have longer-term contracts. After the removal of Russian gas from our portfolio, we need to buy more gas on the spot market… So we are rebuilding the portfolio to add longer-term gas contracts to the portfolio, which protects us from some of these price changes.”
Inflation concerns
A scenario in which energy supplies normalize after four weeks and energy prices fall in the second quarter could lift euro zone inflation from the current 1.9% to 2.5% in the second quarter, Smith said. Meanwhile, inflation could reach 3% in the UK and US
Smith added that this would be “enough to delay but not derail” rate cuts by the Federal Reserve and Bank of England, but “not enough to knock the ECB out of its ‘good place’.”
UK 10 Year Gilts.
Yields on government bonds in Britain and Germany rose as investors revised bets on interest rate policies from the Bank of England and the European Central Bank. According to Bloomberg’s report on Tuesday, European Central Bank governing council member Madis Muller admitted that the possibility of a rate hike has increased.
Analysts say persistently high energy prices for extended periods will drive central bank policy responses, while sharp moves in bond yields highlight market uncertainty in line with major swings in oil and gas since the beginning of the conflict.
Geoff Yu, senior EMEA market strategist at BNY, said that in the short term, the ECB’s rate cuts will probably have to be postponed. But he added there was “too much uncertainty” to provide guidance beyond the next three months.
“It seems very extreme that markets are pricing in two increases, but it is important to act tactically to manage expectations and stabilize inflation expectations,” Yu told CNBC via email. “Europe needs to ensure there is no repeat of 2022-2023.”
He said the continent was much less exposed to a sudden tightening in financial conditions this time because equity positions were not as concentrated.
“First, prices remain at a fraction of their high levels in 2022. Second, thanks to supply diversification, Europe’s energy resilience is now much stronger, so there is no need to overreact. Third, the situation of the cycle is different, because there can be no talk of a post-Covid demand increase,” Yu said.
‘A complex cocktail’
Peter Oppenheimer, global equity strategist at Goldman Sachs, said the broader market environment left Europe facing a “complex cocktail”, with investors’ sentiment towards growth and inflation recalibrating almost “on an hourly basis”.
“For Europe in aggregate, the combination of rising oil prices and a weakening euro, which is what we’ve been seeing for at least the last few weeks, is actually a net positive for earnings,” Oppenheimer told CNBC’s “Squawk Box Europe” on Tuesday. “Of course, it would be a net negative if this combination led to a deterioration in the mix of growth and inflation.”
“We’ve seen a big rise in oil prices and a lot of uncertainty. If that continues, I think it will inevitably have the effect of driving down growth expectations to the point where stocks recover.”
