Record breaking natural gas and electricity prices in Europe could be the harbinger of increased volatility in global commodity markets, according to Goldman Sachs.
"European energy pricing dynamics offer a glimpse of what is in store for other commodity markets, with widening deficits and depleting inventories leading to elevated price volatility," the investment bank's analysts wrote in a new report carried by Bloomberg.
Depleted natural gas inventories and low wind speeds have led to a surge in electricity prices across Europe, putting pressure on governments as consumers protest against soaring power bills ahead of the winter heating season.
Electricity prices from the UK to Spain have jumped to all-time highs, people in Spain have taken to the streets, while prices across Europe so high could become a drag on the economic recovery from the pandemic.
According to Goldman Sachs, Europe's natural gas and electricity prices could rise even further, considering that gas levels in inventories are at a ten-year low-and not filling fast enough-just ahead of the winter heating season that begins next month.
"[D]emand destruction is the only option to rebalance markets," of natural gas in Europe, Goldman's analysts said.
Should supply continue to be lower than usual and the winter turn out to be colder than usual, Europe's gas and electricity prices could jump further from already record levels, Goldman Sachs notes.
Related: 3 Bearish Catalysts For Oil This Fall
Higher prices from here would "ration demand and thus curb energy-intensive industrial production," the investment bank's analysts wrote.
Power prices in the UK, Germany, France, and Spain-some of the largest economies in Europe-have set records over the past week.
The U.S. State Department's envoy for energy security, Amos Hochstein, said during a visit to Poland last week that he was concerned with the low natural gas supplies in Europe ahead of the winter season, which could be colder than usual.
By Tsvetana Paraskova for Oilprice.com
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Comments
Prices could rocket with a harsh winter particularly if Russia decides not to increase its gas supplies to the EU beyond of what is already contracted.
Therefore, Europe’s dependence on Russian piped gas supplies will continue to rise. The EU needs Russia more than Russia needs them.
Moreover, Nord Stream 2 could prove the EU’s saviour bringing an additional 50 billion cubic metres. It is a viable economic project exactly as Russia has been telling the Europeans since the start of the project 12 years ago.in this very day is a godsend to Europe.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Strong buy