What if gas prices start to drop?

The rise in the price of gas has been a real torture for families, companies and governments in recent months.

Thomas Osborne
Thomas Osborne
19 September 2022 Monday 09:59
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What if gas prices start to drop?

The rise in the price of gas has been a real torture for families, companies and governments in recent months. One of the main stimulants of the runaway inflation that shakes Europe and the reason for endless discussions between its Member States to deal with the effect of these increases on the amount of all other energy sources. The rise in gas prices has so far become a stairway to heaven with no known end.

Until now? Since just a few days, a change of sentiment has been detected in the markets among many operators. There are many who begin to think that it is no longer unreasonable that the price of gas has reached its maximum point and that from this moment on it can only go down the path of descent towards more reasonable and less harmful levels for society and the economy. western.

According to the Financial Times, the highest price of gas in the reference markets was reached on August 26, when it marked 343 euros per megawatt – as if a barrel of oil cost 580 euros, which that day was around the 100–, while in recent days it was already trading well below, around 200. Well above the prices before the supply chain problems and the war in Ukraine, but far from the worst moment since the Russian attack on Ukraine.

The North American investment bank Goldman Sachs released a report this past week in which it predicted a possible drop in prices to half of their current levels, that is, 100 euros.

Drastic ups and downs of this type, roller coasters, are common in times of confusion and geostrategic and political changes, so it is risky to draw hasty conclusions from each of these movements. But experts are beginning to accumulate signs of a possible change in trend.

When the crisis began with Vladimir Putin's Russia, the countries most dependent on gas supplies from that country, first of all Germany and also Italy, but in general all the European countries and the rest of the more developed ones, set out to find alternative stocks around the world. A herd of hoarders ready to seize everything at any price. All to ensure minimally acceptable reserves to face next winter.

According to the aforementioned North American bank, those countries, once again led by Germany led by Foreign Minister Olaf Scholz, had already secured 90% of those reserves. And from there, their buying appetite has begun to moderate. On the other hand, the effect on the market of the successive restrictions on Russian supply has weakened, since much of the threat has already been consummated. Shipments to Europe have already fallen by more than 80%, practically 100% of direct shipments to Germany, with which Putin has already spent practically all of his atomic arsenal on this energy front.

And, in the opposite direction, it has managed to get its European clients to reach agreements to limit gas prices and their effects on the energy bill of companies and families. An additional factor pushing gas prices down. As do the measures promoted by the European Commission, chaired by Ursula Von der Leyen, to reduce consumption and save energy –although their scope is still uncertain– and the increasingly notable signs of a downturn in the economy. Activity is affected by price increases, especially energy prices in the case of companies, income and income losses and the drop in trade.

If this downward trend were to consolidate in the coming weeks, the companies that are renegotiating the prices of their gas contracts with supplying countries, as in the case of the Spanish company Naturgy, owned by La Caixa and chaired by Francisco Reynés, could reap the benefits of having dragged out negotiations for months. Now, in the new situation, they could reap the rewards in the form of a lower rise in the bill. Lower in relative terms, since gas is still trading ten times above its traditional level, the one before the pandemic and the war ended. Which would also be good news for its clients, both families and companies.

As has already been said, these first indications should be taken with great caution, as any unforeseen incident can return the process to a bullish and uncontrolled phase. The immediate question is whether, if the decline in gas prices were to consolidate, it would be enough to deactivate the fuse of inflation and reverse the upward course of interest rates imposed by the European Central Bank (ECB) of Christine Lagarde. After two consecutive rate hikes to 1.25%, the latest European price data has fueled speculation of a further 0.75% rise at the October meeting. First of the four announced by the regulatory body of the euro.

To a large extent it will depend on whether you think that price increases have already disregarded their origin, the cost of energy, and are already running free on their own through the rest of the economy. The ECB should consider how high the risk is of propping up an already visibly limping economy with a further and accelerating rise in money costs. The next few weeks will be very intense.