homemarket Newscommodities NewsGlobal shortage to propel energy prices, higher commodity price trend to continue, says expert
Global shortage to propel energy prices, higher commodity price trend to continue, says expert
Energy is a cyclical industry. Therefore, when prices fall, the industry cranks down and it does not make investments or even drill. That is what happened when energy prices fell in early 2020, and the impact of that is felt now.
Energy shortage seems to be a global problem. Data suggests Europe is going through a record gas and electricity price increase amid shortage, coal prices in China are at a record high, the gas prices in the United States are at multiyear high whereas oil prices are also at 2018 highs, so at multiyear highs.
Here is why there is a shortage and a price hike
For the longest time, people have not been investing a lot in fossil fuels and coal because of ESG investment preoccupation and ambitious targets. Moreover, in early 2020, when the whole world was in a lockdown mode, consumption fell, and therefore investments into fossil fuels fell even more. However, what was least expected was the huge V-shaped recovery primarily in energy intensity goods after the reopening. That exceptional recovery was fuelled by an unprecedented liquidity boost given by both central banks and fiscal stimulus by governments.
However, energies like gas, coal, and oil, failed to keep up. Adding to this was a series of weather-related disruptions like winter storms in Texas and hurricane in the Gulf of Mexico.
Price impact
According to Reuters, the overall price index for all commodities shot up from 40 last March to 90 this August. More importantly, the Chinese coal futures prices went up from $119, just two months ago to $180. Dutch gas futures are up from 17 euros per megawatt-hour to 75 euros, all in a matter of months.
Meanwhile, the front-month gas futures prices, year on year (YoY) have risen 140 percent in the US, about 500 percent in Europe, and 600 percent in North Asia, as per Reuters’ data. European gas inventories are down from 93 percent of their overall capacity in 2020 to now 72 percent of the total capacity. In US, gas inventories are 5 percent below their pre-pandemic season average and they are 15 percent below pre-pandemic average in Europe.
Energy is a cyclical industry. Therefore, when prices fall as they did in early 2020, the system immediately cranks down and does not invest and doesn't even drill. The impact of that is being felt now and even if the industry starts cranking up now, it will take several months for the system to get back to normal.
To discuss these developments in-depth, CNBC-TV18 spoke with Ben Cavender, MD, China Market Research Group.
When asked if the energy shortage would balloon into a big crisis that would last for a couple of months and start hurting global growth, Cavendar said, the situation will remain like this for a while.
“If you look at what's happening on the ground in China at present, I don't think it's a crisis here, I think the government's approach has really been to throttle manufacturing, and especially manufacturing skewed towards export. They want to protect the ability of the power companies to at least breakeven because power companies cannot pass those higher prices on to manufacturers or residential. They are trying to still maintain fairly strong domestic consumption that is coming out of factories. But, what we are going to see is a limiting of exports and limiting of manufacturing that is hurting exports. So, it is going to be quite a big problem for a lot of other countries that would ordinarily be buying products from China,“ he explained.
Cavender added that there are potentially going to be dramatic price rises and it is going to take a significant amount of time well before the energy sector actually catches up.
On commodity prices, he said, there has been a lot of pressure for commodities and it is something that both the US and China have been trying to grapple with.
“I am not sure if there has been a very good solution, that it is going to get that under control, just given how the global economy has sort of had this whiplash rebound,” he said, adding that China, has taken the approach of opening up strategic oil reserves, trying to blunt some of the price increases but that is not really nearly enough to solve the problem. So, the issue is going to continue.
The other story in China is what is happening in the real estate sector with developers coming under pressure due to the level of debt that they are carrying and that is actually having the reverse effect, Cavender said. It is potentially softening prices for some building materials but overall, there is still a crunch with continuing higher commodity prices, he said.
For the entire discussion, watch the video
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