The energy price shock that followed Russia’s invasion of Ukraine four years ago is fresh in the minds of European policymakers as the conflict in Iran once again drives oil and gas prices higher. Experts, however, think this time could be different.
Fears of a full-blown energy crisis on that scale — which saw oil top more than $120 a barrel by June 2022, gas prices soar, household energy bills rise, and eurozone inflation hit a record 9% — may yet be overblown, according to investment strategists.
Brent crude, the global oil benchmark, has retreated from the near-$120 per barrel seen earlier in the week, as the International Energy Agency agreed on Wednesday to release a record 400 million barrels of oil from its emergency reserves. European natural gas prices, as measured by the Dutch TTF futures benchmark, also pulled back from a three-year high of 63.77 euros per megawatt-hour and were last seen under 50 euros per MWh on Wednesday.
‘Eerily familiar’
James Smith, developed markets economist focusing on the U.K. at ING, said that while the initial energy price reaction appears “eerily familiar” to the start of the Ukraine invasion, the global economic picture looks very different from the 2022 shock.
“The 2022 energy crisis landed on a global economy that was ripe for inflation to take off. Supply chains were fractured, job markets tight, and fiscal policy was fueling the fire. All of that, to varying degrees, is less true today,” Smith said in a note.
Brent crude.
The impact on Europe’s inflation trajectory hinges on the duration of the conflict, analysts say.
The ongoing shutdown of Qatari production of liquefied natural gas (LNG) — which accounts for almost a fifth of global LNG supply — and attacks on vessels in and near the critical Strait of Hormuz could disrupt oil and gas stocks in Europe for longer.
Qatar has emerged as a key source of LNG supply to Europe, which has cut its dependence on Russian pipeline supply since the invasion of Ukraine.
Michael Lewis, CEO of German multinational energy supplier Uniper, said the company has “weaned itself off” Russian gas since the Ukraine invasion, diversifying its sources across LNG and pipelines from Norway, the U.S., Canada, Australia and Azerbaijan.
“We didn’t want to repeat the challenges of the past which was being reliant on one single source, namely Gazprom,” Lewis told CNBC’s “Squawk Box Europe” on Wednesday.
But he conceded that Europe does not produce the volume of gas it needs to meet its energy needs.
“What we need to do is have more long-term contracts. Following the elimination of Russian gas from our portfolio, we have to buy more gas on the spot market…That’s why we’re rebuilding the portfolio to get more long-term gas contracts into the portfolio which insulates us from some of these price changes.”
Inflation concerns
Smith said that a scenario in which energy supply normalizes after four weeks, bringing energy prices down in the second quarter, could drive eurozone inflation from its current level of 1.9% to to 2.5% by the second quarter. Meanwhile, inflation could hit 3% in the U.K. and the U.S.
That would be “enough to delay, but not derail,” further Federal Reserve and Bank of England rate cuts, but “not enough to move the ECB out of its ‘good place’,” Smith added.
U.K. 10-Year Gilts.
Yields on government bonds in the U.K. and Germany edged higher as investors revised bets on interest rate policies from the Bank of England and the European Central Bank. Madis Muller, a member of the European Central Bank’s governing council, admitted that the probability of a rate hike has increased, according to a Bloomberg report on Tuesday.
Sharp moves in bond yields underline the market uncertainty, chiming with the huge swings in oil and gas since the conflict began, as analysts say that persistent higher-for-longer energy prices will drive central bank policy responses.
Geoff Yu, senior EMEA market strategist at BNY, said that, in the short-term, ECB rate cuts will probably need to be pushed out. But he added there is “far too much uncertainty” to provide guidance beyond the next three months.
“Markets pricing in two hikes seems too excessive, but it is important to manage expectations and pivot tactically to anchor inflation expectations,” Yu told CNBC via email. “Europe needs to ensure 2022-2023 is not repeated.”
He said that the continent is far less exposed to a sudden tightening in financial conditions this time round, as equities positioning is not as concentrated.
“Firstly, prices remain a fraction of their 2022 highs. Secondly, European energy resilience is now much stronger thanks to supply diversification, so there is no need for an overreaction. Thirdly, the state of the cycle is different, as there is no post-Covid demand boost to speak of,” Yu said.
‘A complicated cocktail’
Peter Oppenheimer, chief global equity strategist at Goldman Sachs, said the broader market environment leaves Europe facing a “complicated cocktail” as investor sentiment around growth and inflation recalibrates almost “hour by hour.”
“For Europe in aggregate, the combination of rising oil prices and a weakening euro — at least the set-up that we’ve seen in the last couple of weeks or so — is actually a net positive for earnings,” Oppenheimer told CNBC’s “Squawk Box Europe” on Tuesday. “Of course, to the extent that that combination leads to a deterioration in the growth and inflation mix, that would be a net negative.”
“We’ve seen a massive rise in oil prices, a great deal of uncertainty. If that were to continue I think inevitably it would have the effect of pushing down growth expectation to the point where equities correct.”
