Barclays: ‘Earthquake’ from Energy shock is expected to be ‘nightmare’

Her Eleftherias Kourtali

Europe’s energy crisis will have a longer-term impact, especially on inflation in 2022, than many expect, as Barclays notes in a report on the major issues that will dominate in 2022. In addition to the sharp rise in spot prices in December In recent days, energy prices could remain high for a longer period of time, he warns, given the prospect of tightening supply which will worsen due to the geopolitical scenario, and could exert strong upward pressure on inflation in Europe on the horizon. 6-9 months. The secondary effects of the crisis, as the British bank emphasizes, are the key to any rise in inflation. However, the changes in demand caused by the outbreak of the Omicron variant may offset part of the intensity of energy inflation at the beginning of the year.

In particular, Barclays notes that The gas crisis in Europe is far from easing, despite price volatility this week. Gas reserves remain low, leaving spot prices in the market exposed to volatile factors such as weather and geopolitical tensions. The dangers of a cold winter in Europe, the negligible potential for gas cut-offs, and the low additional volumes of gas supplied by Russia, either to replenish European warehouses or to sell in the spot market, provide strong headwinds for European prices. gas in the short term, as the British bank warns.

If there is a new shift higher in the gas and electricity futures curve, Inflationary pressures during the winter months will increase significantly and there is a risk of further increase in short-term energy inflation, he says.

In addition, current prices in the energy futures market show that Energy prices will remain high after the winter months, suggesting that the already high contribution of gas, electricity and other fuels to inflation is likely to weaken very gradually, as the seasonal drop in demand due to warmer weather could lead to more persistent supply and stock shortages.

With regard to electricity, Barclays points out that electricity generation from renewable sources has remained volatile this year, increasing its dependence on gas and coal.

The “domino effect” of rising gas prices which boosts wholesale and retail electricity prices in Europe has already been observed in most eurozone countries in 2021, as Barclays points out. A high percentage of fixed and adjustable energy tariffs on household accounts, combined with government support measures (including tax cuts and network charges and tariff freezes), have helped to partially offset the impact of wholesale energy fluctuations. in Germany, France and Italy in the second half of 2021. In turn, countries with the highest share of gas and electricity tariffs (Spain, the Netherlands, Belgium) recorded sharp bursts of inflation consistent with higher cost transfers to households.

Assuming that short-term energy price fluctuations in the more exposed smaller European countries will continue to be large in the first quarter of 2022, Barclays expects that The impact of the energy crisis will keep energy contributing to inflation high in the first half of 2022, and will largely offset the deflationary effect of the recent correction in oil prices.

Finally, in addition to winter dynamics in the gas and electricity markets, Barclays sees the risks to the prospects of energy inflation as twofold.

On one side, The slowdown in energy demand due to the winter tightening of restrictions on COVID-19 could be a significant short-term headwind for prices. transport fuels and also affect the prices of other energy commodities, helping to reduce the current momentum of inflation.

On the other hand, however, The effects of inflation could be more pronounced in 2022, when companies adjust prices higher sales to pass on the winter rise in energy prices to production costs.

It is worth noting that and Capital Economics warned this week of the most persistent effects of the current energy crisis. As he noted, higher gas prices will keep inflation higher for longer than expected next year and reduce real household incomes. This component alone is likely to prove transient, but will add to the general upward pressure on prices and possibly inflation expectations in the euro area, which are likely to be a growing concern for ECB policymakers next year.

According to the positive scenario of Capital Economics, the price of gas in Europe will fall to 25 euros by the end of 2022, as he assumes that both the weather and Russian foreign policy will normalize.

However, prices could be much higher if, for example, tensions over Ukraine worsen and Germany does not approve the new Nord Stream 2 gas pipeline. In this scenario, the price of gas jumps to 200 euros per MWh and stays there.