Update on the European Energy Crisis

28 November 23

Europe is in the middle of an ongoing energy crisis, since oil and gas markets are under pressure from geopolitical conflicts and an overall weak global economy. The natural gas sector stands out as one of the most significantly affected. Prices for natural gas surged 15% in October reaching an eight-month high. At one point prices increased by 40% which is quite concerning.

The potential for conflicts further spiralling out of control adds to the uncertainty. Bloomberg Economics suggests a global recession that could wipe off $1 trillion from the global economy pushing oil prices to $150 per barrel. Such a development would certainly dictate the gas markets to skyrocket.

With that being said, Europe’s gas inventories are currently at 96% capacity, which is well above the seasonal average. Following historical data a large withdrawal is not expected, providing a positive outlook for gas availability. Of course, that prognosis is subject to change depending on the upcoming winter weather.

The economic slowdown in the eurozone might mitigate the recent bullish trends in gas prices. Slowdown in manufacturing and business activity across major European economies, including Germany and France, reflect economic contraction. This does mean a potential future decrease in the demand for gas.

Let’s take Germany for example, Europe’s largest gas market, it has seen a decline in both industrial and residential gas consumption. Totaling to a 13% decrease in gas consumption for the first half of 2023.

If we look at what industrial investors are predicting, hedge funds are already selling gas futures, showing a bearish sentiment towards the market. Natural gas prices are already down by 3% due to slowed demand. However, a slight consumption increase in October shows that the situation is more nuanced than it could first appear.

What does all of this mean for the average household? Well, mostly uncertainty and potential budget impacts. Volatility in energy markets could trickle down to the retail markets as it adds to increased inflation. Retail sales across the eurozone have already declined by 2.9% YoY, this just further proves that careful planning and strategic decisions are needed both by businesses and governments.

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