Facing an energy crisis ahead of winter heating season

Vrasidas Neofytou
Head of Investment Research

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Energy prices have become a hot topic of discussion the last few weeks, as investors worry about a possible energy crisis and high electricity bills ahead of the winter heating season in the Northern Hemisphere.

Natural gas and crude oil are the most important heating fuels and are responsible for more than 50% of power generation in modern societies, such as the United States, Europe, and Asia.

Crude oil prices trade above 70 dollars per barrel, gaining more than 40% this year so far, after the historic production cuts from OPEC and its allies, some unexpected supply disruptions, and on the back of recovering demand after the pandemic.

Natural gas prices have gained more than 100% this year, breaking above 5 dollars per million BTU (British thermal units), for the first time since 2014, on falling production, record LNG exports, and lower-than-expected gas stockpiles.

The combination of falling supply and growing demand have resulted in tighter gas inventories. As a result, the Northern Hemisphere is facing a new energy crisis since natural gas in storage is 15% below the five-year average, increasing the worries for a shortage of gas supply ahead of the winter heating season.

High energy prices naturally have a negative effect on electricity prices, which impact all of society, especially households and businesses, with many already under financial pressure due to the prolonged effects of the pandemic.

Households have suddenly found themselves paying roughly 40% more than they did last year, to heat and light their homes.

The energy crisis is currently experienced more in Europe, driven by fewer gas supplies from Russia, and the unexpected, lower-than-normal electricity production generated from wind turbines, due to the warm and less windy European summer.

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