The story of energy inflation is being dismantled at full speed in Europe in 2023. Buying natural gas now is 60% cheaper than twelve months ago, but the year-on-year comparison with respect to 2022 records means that this summer could be even ten times more affordable than then.
In fact, some of the price references such as the US Henry Hub or the Dutch TTF are trading 75% and 90% below the highs reached in the last episode of panic buying due to the need in Europe to fill strategic reserves before winter and avoid Russia’s threat to cut off energy supplies to Central European countries, Poland and Germany.
“European natural gas prices continue to decline, offering deflationary relief [a la economía]. In addition, the prospect of mild and windy weather, and especially the decline in willingness to import at ‘premium’ prices seem to be bearish factors at play,” says Norbert Rücker, macroeconomics strategist and ‘Next Generation’ at the Swiss bank Julius Baer.
In this sense, the expert considers that global gas prices have become a thermometer that points to a wide availability of energy for the summer and months away before the filling of reserves for the winter season (November -March) between 2023 and 2024. “The energy supply has improved considerably and the panic buying, herd effect and hoarding behaviors that marked the confusion of last year have completely disappeared,” adds Rücker.
The amplifying effects of the collapse in gas prices – the basis of electricity generation in Europe – have not yet been fully transferred to the consumer price indices (CPI), but they will continue to exert downward pressure in the coming months as the pages of the calendar. The experts of the Swiss firm see that prices can sink even more. “We maintain our bearish views for now and see more downside in the long term,” they add.
Will the CPI contract in Spain in the summer?
Last year, the Bank of Spain estimated that around a third of the record inflation of August 2022 -above double digits or 10%- had its origin in the rise in gas prices, which was multiplied by with respect to the ten ‘normal’ levels that they now recover. Some economists speak softly about the deflationary effect that this pendulum movement of hydrocarbons can cause in the short term. However, the same impact is not expected because companies and producers have consolidated the price increases and do not plan to lower them.
In the Iberian Mibgas market, which has triggered the entry of Russian fuel in 2023, the price marks reference prices around 25 euros/MWh, 37% below the gas ceiling set by the Government that requires subsidizing the cost of the gas used to generate electricity -exceeding 40 euros/MWh- through electricity bills, an additional cost that will gradually disappear from electricity bills in the coming calculation periods. The big question is once again: why are gas prices falling sharply in the middle of the war?
“The most common driver is probably that European buyers offer less premium to obtain natural gas in global markets, which reduces the need for immediate purchases due to the use of coal,” Rücker explains.
In his report, Julius Baer mentions the mild and windy climate that drives wind generation at a European level. In the case of Spain, photovoltaic production has skyrocketed in recent times and has pushed electricity prices down, especially on weekends. For the Iberian Peninsula, there is an additional element of influence that is accelerating the collapse of electricity prices due to its massive, cheap generation capacity and without increasing CO2 emissions: “The partial return of French nuclear plants.”
In addition to the return to cruising speed of electricity production in France, the energy heart of Europe, the operators also point out that the majority of LNG export terminals on the US East coast are operating at full capacity, above demand . If the cold has bullish connotations for energy prices, the heat also due to the use of gas to meet production when demand peaks occur.
Rücker considers that the panic calls from some European leaders such as Pedro Sánchez (October 2021) or from the European Commission itself headed by Von der Leyen, which caused widespread tension in the market, will not be reproduced. On the contrary, Europe seems finally ready two years later to face an energy future in a more independent way for multiple reasons.
“Hot weather and its impact on demand for electricity via air conditioning remains a bullish item to watch in the coming weeks and months. That said, the global improvement in power availability, including growth in exports of liquefied natural gas (LNG), the rise in coal mining, the partial revival of nuclear power, especially in Asia, and substantial growth in renewable energy installations, suggesting that markets in 2023 have much greater scope for absorb temporary spikes compared to 2022”.