Energy prices are suggesting that Europe will face a lot more inflation

This week has seen another phase in the energy crisis which is facing Europe. In sense the Rolling Stones were correct and indeed prescient with their lyric “It’s a gas,gas,gas.” The domestic energy reliance on gas and switching towards renewables opened a flank which as we have looked at before has been opened by the fact that others around the world have become more dependent on gas as well. This has led to the situation described below.

LONDON, Dec 7 (Reuters) – Europe’s gas stocks started the winter at their lowest for eight years and have been depleting rapidly, heightening concerns they could become uncomfortably low in early 2022 and exert upward pressure on prices.

I think they mean more of an upwards influence on prices! The exact numbers are below.

Inventories in the EU and Britain (EU28) fell to the equivalent of only 742 terawatt hours (TWh) on Dec. 5. That was the lowest for this time of year since 2013, according to data compiled by Gas Infrastructure Europe.

Stocks have reduced by 97 TWh (12%) since the start of October, one of the largest drawdowns in the past decade, despite prices trading near record highs, which had been expected to limit consumption.

Storage facilities are now only 66% full, a level of depletion they would not normally reach until the middle of January in an average winter.

It is revealing in itself that there is interest in gas inventory levels. This gets worse as we note that we have been drawing them down at a relatively rapid rate. The idea that prices would limit consumption has been in play in the industrial sector as we have seen business close as I will look at later. But domestic consumption has continued partly because government’s have used subsidies to hide the true picture and partly because the full impact of the price rises has nor yet arrived.

There has been a particular issue with Poland this week where there is something of a crisis.

On December 6, Polskie Sieci Elektroenergetyczne (PSE) announced a power reserve deficit of 1000 MW, which was covered by energy supplies from neighbors under interconnection agreements with its counterparts in Sweden, Germany, Lithuania and Ukraine……All because of the shortage of wind energy and the unavailability of a number of coal-fired CHP plants undergoing renovation or experiencing forced disconnection. ( Biznes Alert )

Sweden even offered to fire up an oil powered plant to help if required. But this is a type of exporting the problem as other countries have their issues and it goes against the mantra of the establishment as highlighted by this earlier from the European Investment Bank.

 The #EU leadership on #climate shows signs of paying off, w/ 43% of EU companies having already made climate-related investment compared to 28% in the US.

The Poles were quite near to a situation where they would have had a completely different answer to that and the price of energy is something that is already an issue.

Industrial Closures

On Monday there was this announcement in Romania.

Azomures Targu Mures, the most important producer of fertilizers for the Romanian agriculture and industrial usage in Romania, informs that it is facing an exceptional situation due to the very high prices for energy, natural gas and electricity. This marks the beginning of preparations for the temporary shutdown of production activities.

This is a particular issue because a lack of fertiliser supply is likely to lead to lower food production and thus higher food prices next year. So in terms of the inflation debate this matters in two ways. The first is that it is the opposite of the “Transitory” inflation claims of the central bankers. But more importantly it is a route for inflation to become baked into the system or be what is called a second-order effect.

Whilst Iceland is not in the European Union it does have close ties and this will raise fears.

Landsvirkjun has decided that the reduction in the supply of electricity to fishmeal factories will take effect immediately, but not in January as planned.

The reduction does not only apply to the factories, but also to large users with curtailable short-term contracts, such as data centers and smelters. They have in common with fishmeal factories that they have agreed on a part of renewable energy. In addition, Landsvirkjun has rejected all requests from new customers for energy purchases for electronic coins.

There is an additional complication from Bitcoin mining and its energy requirements but with its natural resources you might think that Iceland would be fine.

France

The issue has moved on somewhat from the issue for this year onto next year as shown below.

CHART OF THE DAY: French 1-year forward electricity jumps to a record high of almost €200 per MWh. The rise in long-term power prices (vs day-ahead) is crucial as this rise is going to filter into retail and SMEs tariffs. German 1-year forward also close at a record high today. pic.twitter.com/7CYHaFhDla

— Javier Blas (@JavierBlas) December 7, 2021

.This is especially important for the path of inflation as the “Transitory” argument rather crumbles in the face of such numbers. Only last week ECB President Christine Lagarde put out a broadcast assuring people that inflation is a “hump” and will soon “decline”. Whereas we see pressure building for next year as this update this morning from Javier Blas shows.

UPDATE: French 1-year forward power prices have now broken the €200 per MWh barrier

Oh and whilst we are at it it is more than just France.

Oof German Power for next year rises to record €179.60 MWH ( @mhewson_CMC )

The French situation is revealing in that its large nuclear power sector ( 55% of its power as I type this) has not protected it. I guess it is regretting not building even more although the one that it is building at Flamanville seems to go from one problem to another. In spite of all of this France has recently been taking power from the UK ( 2GW as I type this) as some reactors have required maintenance.

The ECB

This has completely miscalculated the situation. Let me illustrate this via the words of Vice-President De Guindos.

Over the coming months, inflation is expected to be close to zero percent, averaging 0.3 percent in 2020, before slowly recovering to 0.8 percent next year and reaching 1.3 percent in 2022. ( 10th June 2020)

So there was not going to be any inflation in spite of the fact he was voting for the money supply to be pumped up. Then on November 17th this year

ECB Vice President Luis de Guindos says 2022 will prove that the current bout of elevated inflation is temporary ( Bloomberg )

Then on the 29th of November this year.

 What is certain is that the factors behind the high rate of inflation we’re experiencing will not last, and we should see them fade next year.

And now today.

ECB’s De Guindos: The Current Higher Phase Of Inflation Could Last Longer Than Earlier Thought ( @LiveSquawk )

And so it begins

Comment

The situation this winter is going to be both complex and unstable. The beginning point for the latter is that a considerable amount of the power supply is now unreliable and this comes in two forms. The most basic is whether the wind blows? Next comes the issue of how much it does which is not as predictable as some claim. For example as yesterday progressed things became strong for UK wind power but the forecast of over 15 GW in the evening was replaced by a reality that did not reach 14 GW. On cold still days the pressure is really going to hit prices and on mild windy ones we will see the reverse.

This has been made worse by the ECB in its rush to look green as it has supported the policies which make things unstable and thus have raised the price. The claimed answer is more renewables but that will with existing technology only make things worse. In fact the policies of the establishment have continued to push prices higher.

EU carbon allowances have been posting record prices in 2021 | In December 2020, they climbed above 30 EUR and topped the previous price record from June 2008 | This week, they have climbed above 80 euros per tonne | No stop in sight ( @E_Setien)

It is quite a mess…….But it has a very serious component as this will reduce living-standards and maybe by quite a bit especially if we factor in the effect on likely food prices.

Of course all bets would be off if this took place.

WASHINGTON, Dec 7 (Reuters) – U.S. officials have told members of Congress they have an understanding with Germany about shutting down the Nord Stream 2 natural gas pipeline if Russia invades Ukraine, a senior congressional aide told Reuters on Tuesday.

I know that it is not yet open, but future prices would be affected especially if Russia retaliated.