Natural gas prices fall - Putin and the EU

The latest drop in gas prices and its impact on production costs… Gas prices have dropped an average of $1.22 per gallon across the US since peaking in June - a 24% drop in over 18 weeks. Average gasoline prices are currently $3.99, with 38 states and the District of Columbia lower, with more than two-thirds of all states priced below $3.79. Nine states have prices of $3.39 or less, and 15 states average gasoline prices of $3.49 or less.

Biden urges companies to immediately pass on lower energy costs to consumers. Energy refiners' profits per gallon of gasoline are now about twice what is typical for this time of year, and the retailer's margin on refinery price is more than 40% above the typical level. Adding more than $0.60 to the average price of a gallon of gas, these large industry profit margins kept pump prices higher than they should have been. Keeping prices high even as input costs are falling is unacceptable, and the President will urge companies to pass on their savings to consumers - now.

Gas prices fell in September, helping to pull down general inflation slightly on an annual basis. However, these falling prices were not enough to balance the monthly inflation, which increased by 0.4% in September.

Gas prices fell 4.9% in September, according to data from the inflation report. However, gasoline prices have been rising sharply in recent weeks due to the temporary closure of refineries and increased demand following the 98-day slump that ended last month. According to data from AAA, the national average price of gasoline was $3,913.

Despite lower gas prices, the overall energy index rose 19.8% for the 12 months through September. In September, natural gas increased by 2.9% and electricity increased by 0.4%. While the increase in gas prices will be short-lived, energy costs are expected to rise ahead of the winter heating season as demand rises. The rise in energy prices could pose a challenge for the Fed, complicating the campaign to lower interest rates to curb inflation.

 Putin, supply problem, high cost and stagnation…

Nothing can destroy oil demand and bring prices down faster than recessions. Not only does it cause job losses, which means fewer people commute, but those who keep their jobs always cut back on their spending, which means less travel and fewer vacations to shop or eat out. All this reduces the amount of fuel consumed.

Fundamental economics means that when demand for a product is lower, prices usually fall pretty quickly unless there is a corresponding drop in supply.

On the supply side, OPEC, the world's leading producer, decided to cut oil production by 2 million barrels per day at the beginning of October. In any case, this has effectively pushed prices up a bit, as production quotas were not initially met by OPEC members.

Putin's Russia claims that punitive Western economic sanctions are responsible for indefinitely halting gas supplies through Europe's main pipeline. This represents the clearest indication that the Kremlin is trying to force Europe to lift economic measures so that Moscow can turn the taps back on before winter comes.

The chart below shows the natural gas price in the US for the last 5 years.

Natural Gas (USD/MMBtu)… Source: Trading Economics

Natural gas futures tied to the TTF, Europe's wholesale gas price, fell below €100 per megawatt hour in the fourth week of October, a new low since the beginning of June, and about 70% again from August highs as winter scarcity concerns eased. Weather in Europe is expected to be milder than normal for this time of year by the end of the month. At the same time, ample LNG supplies have filled Europe's gas storage areas with Germany's stock ratio reaching 96%. In addition, the governments of the European Union came together to support urgent measures to tackle high energy costs, including a price ceiling, in addition to the joint natural gas purchase plan.

Natural Gas EU Dutch TTF (EUR/MWh)… Source: Trading Economics

Producer and consumer energy prices in the EU… Source: Eurostat

 What is the EU doing?

EU countries are united and closely coordinating measures to respond to rising prices and imbalances in the energy market.

Union among EU member states is essential to face the energy crisis. Working together is the best way for EU countries to better mitigate the impact of the crisis and reduce risks. For example, joint energy purchases can reduce import costs.

In the current context of high uncertainty over Russia's energy supply and distribution disruptions, solidarity among EU countries is also needed to provide support to countries that are more dependent on Russian energy and thus more affected by any supply disruptions.

EU countries are working together on:

Reducing energy costs for households and businesses…

The regulation includes three emergency measures:

 Reducing electricity use

Limitation of incomes of electricity producers

Providing solidarity contribution from fossil fuel enterprises

The reduction in electricity consumption is expected to have a positive impact on EU electricity prices and, consequently, on consumers' energy bills. EU countries will reduce their total electricity use by at least 5% during peak hours, which will reduce the demand for gas used in electricity generation and thus help lower prices.

The new rules will allow member states to collect funds from the surplus profits of the energy sector and redistribute them to the most vulnerable people and companies in the EU, providing direct support to those struggling to pay the bills.

Reducing the EU's energy dependencies…

With the Versailles Declaration adopted at the meeting in March, the leaders agreed to gradually reduce imports from Russia:

 Reducing the overall dependence on fossil fuels

Diversification of energy sources and routes, including liquefied natural gas (LNG)

Accelerate the development of renewable and hydrogen

 Improved interconnections between EU energy networks

 Increased energy efficiency

New agreements have been reached on energy supply with international partners:

The United States and Canada increased their LNG deliveries to the EU.

Norway provides more gas.

A memorandum of understanding was signed with Azerbaijan to increase gas distribution.

New deliveries are planned from Israel and Egypt.

 Securing gas supplies…

As gas supply deliveries become less predictable, with Russia halting deliveries to some EU countries, the Council has taken urgent measures to:

Safe gas supply for winter

Reducing gas demand in the EU

In June 2022, the Council adopted a new gas storage regulation aimed at ensuring that storage facilities are filled before the cold season: underground gas storages in the territory of Member States will be filled to at least 80% of their capacity by 1 November 2022, and 90% in subsequent winters.

By 17 October 2022, most EU countries had managed to store the required level of gas in their reserves – EU average = 92%.

Accelerating the green transition…

EU countries are committed to the goals of the European Green Deal to reduce EU greenhouse gas emissions and achieve climate neutrality in the EU by 2050. This requires an overhaul of the EU's energy system and replacing fossil fuels with cleaner forms of energy.

The green transition will take the EU to:

Less dependence on fossil fuels

Reduced energy dependencies

A cleaner environment and better health

Renewables are the key to the energy transition. It is the cheapest and cleanest form of energy available and can be used to generate energy within the EU, helping to reduce reliance on energy imports.

What does it mean for the EU as an energy crisis contractor? High inflation and recession? The energy crisis that began with Russia's invasion of Ukraine has led to an unprecedented rise in inflation across the continent, with governments spending billions of euros to help consumers and businesses as their economies slide into recession. The bloc's energy ministers are meeting to discuss more urgent measures, including a tentative price ceiling.

If prices are down and the weather is mild, if citizens heed the call to stop energy use, and if some of the worst outcomes are priced in from the markets, Europe could benefit from further reductions in energy costs. This could mean that a recession is averted, inflation slows earlier than expected, and the European Central Bank can ease its painful rate hikes.

And given the unusually high temperatures in Europe delaying the seasonal increase in heating demand, prices could drop further in the coming days.

But that could change once the cold weather finally settles, and the forward price curve still shows a jump in gas costs in the months ahead. While Europe may struggle to replenish its stockpiles without Russian gas next summer, competition with China for vital fuel - after the Covid lockdowns - could intensify.

This means prolonged tensions and high prices compared to historical levels until a new wave of LNG installations kicks in and global supply tightening eases.

'As temperatures begin to drop and warehouses are emptied, the market reality of supply-demand mismatch will mean higher prices and translate into more inflationary pressures,' said Katja Yafimava, senior research fellow at the Oxford Energy Research Institute: 'There is no reason to expect the forward curve to drop. '

ECB rate hike and bond purchase… “The European Central Bank is likely to make another big 75 basis points interest rate move,” said DWS wealth management economist Ulrike Kastens: 'Concerns and the risk of derailment in inflation expectations may prompt the ECB to take this bold step.'

Since the policy meeting in September, when the ECB raised interest rates by 75 basis points, headline inflation came in stronger than expected and hit a record 9.9%. At the same time, in addition to the risks of wage-price spirals, there were new signs of rising inflation expectations.

Inflation expectations exceeding the ECB's 2% target will be the strongest argument for aggressive tightening, even among policy pigeons.

'We will also need to be vigilant for a possible anchoring of medium and long-term inflation expectations above 2%,' Spain's central bank governor Pablo Hernández de Cos said last month.

Eisenschmidt said the ECB could lay the groundwork for reducing around 5 trillion euros in bond holdings by changing the guidance on reinvestment of its APP asset purchase program, paving the way for a decision on APP reinvestments in December.

This is when policymakers may come under longer-term political fire, as some governments rely heavily on ECB support. Even the most hawkish policy makers have signaled that the central bank will tread very carefully, phasing out reinvestments in maturing bonds purchased under the APP asset-buying program in the spring of next year at the earliest.

Conclusion? The current energy crisis is a supply-side shock, and inelastic energy demand is driving prices up sharply. This was the main topic of the Macroeconomic Dialogue, where social partners and representatives from the European Commission, the European Central Bank and the Ministries of Finance discussed this difficult economic situation.

In addition to the labor shortages and supply chain disruptions that are the legacy of the pandemic, businesses are suffering from rising costs, causing more and more losses and reduced production. At the same time, households will face declining real incomes due to high inflation rates and will have to reduce demand. If energy prices for businesses and households are not lowered, both could lead to recession.

In October 2022, the European Council reached an agreement on additional measures to be taken at EU level to address the energy crisis. The leaders urged the Council and the Commission to urgently take concrete decisions.

Kaynak: Tera Yatırım
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