When trying to analyze what may happen in 2023 -and why not in 2024 and 2025-, it is key to talk about energy prices, especially the price of gas and electricity in Europe. For two reasons, one because it is the key to reducing inflation and two because the outlook has clearly changed dramatically for the better in the last two weeks. However, this does not seem to have any effect on the ECB whose president says there will be two more interest rate hikes in the first six months of this year, as reported in December, although now spot prices and the futures curve gas prices are 50% below the level at that time and, therefore, inflation should drop at least two points more than what was forecast with December prices.
Why this change in perspectives, what are the forces or variables that explain this change in perspectives regarding the price of natural gas and electricity in euros? basically the disappearance of the supply interruption risk premium as a consequence of the reduction of imports from Russia. The current outlook is that the probability of supply disruptions in 2023 and 2024 is comparatively minimal compared to what was expected six months ago and this removes a risk premium that has been huge since May 2022. In fact, prices are not are increasing, although the demand is recovering due to the drop in temperatures due to the cold wave. This is so because this increase is not perceived as a serious problem since gas inventories or storages are at all-time highs, twice as many as on the same date last year; In addition, the capacity to receive liquefied gas increases in Germany and other countries, and finally, production in Norway and exports to Europe have doubled.
In summary, gas prices in Europe could be close to half the level of last year, although yes, we are talking about much higher prices than in the 2015-2019 period. It is true that these prices translate into marginal prices of electricity generated with gas between 100 and 200 euros megawatt hour (MGh) but they can be lower when there is a lot of wind generation. In addition, French nuclear generation is picking up and hydroelectric reserves are at multi-year highs. In the Spanish case, it is joined by a system that limits the marginal price but, for example, had almost no effect this past week given the increase in wind and hydroelectric generation in relation to 2022. The sum of both things doubled (or more ) to account for 60% of the total electricity produced in Spain, and the prices during the week did not exceed 50 euros MWh.
This price collapse is one of the reasons that has led the markets to correct their view that the recession would be certain in this first quarter of 2023. The other reason is the end of the zero Covid policy in China. There is talk in some reports that there would already be some 900 million people who would have been infected, with which, in a few months, and despite the increase in cases and deaths, herd immunity will be achieved and it will be very difficult for it to return. to severe lockdowns and economic paralysis. For this reason, all analysts are revising growth in China upwards, a country that is already 20% of the world economy, and if it grows again to 6% in 2023 it will boost the world economy.
The only place where a moderation is observed is in the US, but not only in consumption and construction, but also in inflation. This has led the Fed, which will make a new interest rate decision on February 1, to talk only of raising 25 basis points. Given the less and less bullish view of the Fed and the very obvious bullish declarations of rate hikes in Europe, it is to be expected that the euro will continue to appreciate.
Of course, now we can understand the ECB and its president: this is what explains the behavior of the ECB, a strong euro will contain the price of oil, which is denominated in dollars, in euros, and especially diesel and gas, and will contribute to reducing the inflation. Note, the explanation is mine, a central bank with the objective of containing supply inflation, yes, it is the first in the world. Although it is also the first in the world to limit investment in fossil fuels via banking supervision, contributing to higher prices in dollars, but this is another story.