The energy shock destabilizes the markets

By Borja de la Cruz

Despite the energy transition that we are experiencing globally and that we hear about every day, it is true that there is still a great dependence on the energy based on fossil raw materials. In recent weeks we have witnessed a notable increase in the price of these fuels, producing a One-off shock in the global market that could lead to an energy crisis if measures are not taken, although it is true that it is sponsored by a series of factors which we try to explain below.

First, there has been a increased demand for goods and services due to the economic reopening since the confinements of the first half of 2020 caused by the pandemic. The variables that explain this increase in demand are: greater industrial production to respond to the rise in world consumption and a progressive recovery of the tourism sector (transport by sea, land and air, among others. Second, estimates of that winter is going to be especially harsh in the northern hemisphere they make the supply of energy essential to be able to support it. This is related to the scarce supply of the countries and therefore, it is trying to increase the reserves of raw materials of fossil fuels at all costs.

Third, the meager inventory maintained by nations and the resupply that they are carrying out in the last weeks. India, for example, has just announced that it has coal left for 4 more days, indicating the need to increase the stock; German thermal power plants announced that they had no coal left; China is replenishing with Australian coal despite import prohibitions with this country; US strategic oil reserves are 15% below 2020 levels. Fourth, OPEC (Organization of oil-exporting countries), has decided to keep intact its original plan to increase 400,000 barrels of crude per month, so that the supply continues to have the same structure proposed for months while the demand has suffered a drastic increase in the last weeks. Finally, the logistical difficulties that loom in the commercial context of today, due to bottlenecks originated in supply chains, affecting maritime transport of all types of products, have also influenced the rise in prices of fossil fuels.

All these factors have led to the rise in prices of this class of raw materials that have reached exorbitant returns in so far this year. Currently, a barrel of Brent is trading around $ 82 / barrel, its highest level since 2018 and registering + 59% in 2021. On the other hand, the steepest rise is due to natural gas, especially European gas, which has made a + 360% rally so far this year. Finally, coal has reached the level of $ 246 / MT (+ 250% in the year).

The impact at first sight on the average citizen it would be located in its disposable income due to the rise in prices derived from the increases in energy costs in the wholesale markets, especially electricity, which depends on the evolution of the price of natural gas. It is likely, and it is already happening in Spain for example, that governments will have to intervene and regulate prices in some way to try to cushion this impact.

The second derivative of this escalation in energy prices is that it can lead to a higher inflation rate and cause fears lead to sustained high inflation in time, rather than temporal as is currently estimated. This would lead to a change in the monetary policy of the major central banks, which would adopt a more hawkish and with rate hikes earlier than had been estimated. This situation, together with other variables, have led to corrections in all the markets of the world, with high-growth stocks, such as technology, being the most affected.

From Cross Capital we estimate that these tensions in energy prices will last for a few months and should be triggered in the market (for example, the recent announcement by Putin that increases the supply of natural gas to Europe) to mitigate this escalation of prices, regardless of the measures adopted by the governments concerned. We’ll be alert.


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