Surging energy costs threaten global economic growth

Vrasidas Neofytou
Head of Investment Research

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Surging energy costs threaten global economic growth

Global equities lost 1,5% on Wednesday as investors worry over surging energy costs and high inflation which would derail economic recovery after pandemic, while the International Monetary Fund cut its global economic growth forecast for 2021 to slightly below its July forecast of 6%.

Brent oil tops $83/b and Natural gas hits fresh records:

The energy sector continues outperforming the market as the prices of crude oil, natural gas, and coal have hit fresh multi-year highs this week amid tighter supplies, lower-than-average inventories, and strong demand ahead of the winter heating season in North Hemisphere.

The international benchmark Brent crude rose to a three-year high of $83/b on Wednesday while U.S. benchmark WTI crude climbed to near $80/b, hitting its highest since 2014.

The rally in oil prices was driven by the decision of the OPEC- Organization of the Petroleum Exporting Countries, and its allies led by Russia, known as OPEC+ alliance, to stick to their planned output increase of 400,000 barrels per month rather than pumping even more crude.

Meanwhile, the price of the cleanest burning fossil fuel, Natural gas, climbed to $6,40/MMBtu in the U.S-based Henry hub, amid robust global “green” demand and record low inventories levels in Asia and Europe ahead of winter heading season.

The lower-than-expected gas supplies from Russia, the colder winter, the hotter summer, and the competition for LNG supplies have caused a delay in the injection gas season during the summer.

As a result, the European and Asian gas inventories have fallen to around 70% level compared to the 5-year average of nearly 90%, forcing local governments to order huge quantities of gas supplies at any cost ahead of winter, skyrocketing the prices of natural gas and Liquified Natural Gas (LNG).

Global economic growth under threat:

Investors are afraid that the rising energy costs and supply chain disruptions would feed inflationary pressure in global economies, generating financial problems in households, global trading, and industries.

The elevating inflation rates could potentially threaten the global economic recovery after the pandemic, just as global trade and consumption growth is picking up as economies reopen on the back of successful vaccination campaigns.

The first negative signs in consumption activity have started coming up in the industrial-focused Eurozone, with the German factory orders, a normally reliable leading indicator of trends in Europe's largest economy, falling 7.7% in August, a sharp slowdown from the 4.9% gain in July.

Meanwhile, the Eurozone’s August retail sales increased only +0,3% vs +0,8% market expectation amid rising costs in food, drinks, and tobacco.

On top of that, IMF-International Monetary Fund on Tuesday cut its global economic growth forecast for 2021 to slightly below its July forecast of 6%, citing risks associated with debt, inflation, and divergent economic trends in the wake of the Covid-19 pandemic.

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