Energy Crisis

In Europe, electricity prices are bolstering amid the fourth wave of coronavirus infections. The unforeseen spike in the wholesale power market ahead of the winter may boost inflation to higher levels. Supply shortage, high energy prices and overly leveraged markets are the perfect recipes for an economic collapse. Will Europe face a new energy crisis?

For those who remember the 1970s, a deficit in energy supply can not only plunge the economy into recession but also dislocate the financial markets. While oil prices have been relatively stable over the recent months, other commodities, including electricity, are surfing on a wave of hyper-inflated prices driven by a supply shortage. Power and especially green power, was allegedly supposed to deliver humanity from the forthcoming environmental crisis. But when the megawatt prices go deep into consumers’ pockets, old alternatives seem to work well. The low output of renewable energy and the wind farms production below expectations boosted the cost of power in most European countries exponentially.  

For instance, the price of German power climbed by 36% over the last month to a surreal level of 10 EUR for one megawatt. France, a country served essentially by nuclear energy, the electricity price jumped by 50%. In the United Kingdom, the megawatt hour is above 380 GBP, double compared to 150 GBP a few weeks ago.

Europe’s strategy focused on renewable energy worked counterintuitively. As a result, the prices of fossil fuels, including gas and coal, are increasing exponentially. Most sectors of the economy will be affected, resulting in a rising in consumer prices for other goods and services. The energy crisis can propel the hyper-inflation triggered by the monetary policies implemented since the pandemic outbreak.  

Needless to say, a global energy crisis could have dramatic effects on the stock market. Tesla, the market champion of electric vehicles, may need to review its strategy and its business projections in the foreseeable future, with electricity prices being less competitive.
Institutional investors will most likely rebalance their portfolio, shorting some of their equity exposure and increasing the weight of commodities positions.

The energy crisis has not yet overwhelmed us, but it will if we do not act quickly. It's a problem that we will not be able to solve in the next few years, and it's likely to get progressively worse through the rest of this century. We must not be selfish or timid if we hope to have a decent world for our children and grandchildren. We simply must balance our demand for energy with our rapidly shrinking resources. By acting now we can control our future instead of letting the future control us. Jimmy Carter, US President

Market overview

The recent US inflation figures show small ease compared to the previous month but underline a trend of persistence. The market continued its pullback, and the leading stock indices retreated, signalling a bearish sentiment.

The bullish view on commodities markets and the exponential appreciation of the energy complex accentuate the pressure on the stock market. Central banks’ assets repurchase strategy is less efficient for absorbing the effects of supply shortage. The real currency is not fiat, not crypto. It is a physical commodity.

Commodities:

Natural gas

Trouble never comes alone. Dutch and British natural gas futures surged by over 10% on Wednesday, boosting the price of the therm to a new yearly record. Since the beginning of the year, gas prices have almost quadrupled amid a supply shortage from Russia, Europe’s leading energy provider. The relationship between the EU and Russia with respect to energy policies are overly complex. The construction of several gas pipelines was put on standby amid political issues between Brussels and Moscow. The surge in price is a result of a geopolitical froing and unforeseen increase in demand.

Commodities:

Coal

Over the past two decades, we have repeatedly heard that coal is a dying commodity. However, the whopping electricity price in Europe shows that every energy source is welcome in times of shortage. Coal is the dirtiest energy source in terms of carbon emission, yet Europe is re-evaluating its options amid a foreseeable energy crisis throughout the winter. Coal reserves at European ports are at the lowest since 2016, pushing the coal prices to the highest level in a decade.

Surging coal demand from China has boosted the price of coal amid global policies for decarbonisation and coal exit in the long term. However, one-third of Germany’s power production still relies on fossils. Therefore, the current rally in electricity price will not end very soon given the gas and coal market situation.

Commodities:

Carbon

EU carbon permits(EUA) prices under the EU Emissions Trading Scheme are capitalising on the solid momentum built from the beginning of the year. The EUAs ended the week 2.4% down from the previous week, slightly below the 60 euros psychological level. Nevertheless, the carbon reached historic record prices, thereby delivering a strong signal ahead of the 2021 United Nations Climate Change Conference planned for November in Glasgow. Furthermore, the whopping carbon prices contribute partially to the rise of electricity costs in Europe, where all power suppliers are requested to decarbonise their production.

Market outlook

The Dow Jones Index ended the week into negative territory after plunging below 34,600. After two consecutive weeks in the red, the stock market signals the beginning of the bearish pattern. The foreseeable market pullback is putting investors in a risky spot.

Bitcoin’s price managed to regain some of its losses and ended the week above 48,000 USD. Nevertheless, high electricity prices will put additional negative pressure on mineable cryptocurrencies.

It is only a matter of time until the power, gas, and coal bubble will impact oil prices. Thus, there are sound reasons to believe that Brent could climb towards 80 US.

The Gold ounce suffered massive losses, going below the 1,760 mark.  Nevertheless, if the Fed's announced bonds tapering is confirmed, the gold ounce could move back into the green.