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Editor's Note: Below is a note written by Hedgeye editor Eric Wallerstein and Junior Macro analyst Ryan Ricci. For more insights like this, sign up for our free Weekend Reading newsletter. |
The messy Natural Gas situation in Europe refuses to abate, buttressing inflation and suppressing consumer spending power.
Russia, Gazprom, and Europe's underinvestment in "dirty" energy (and closing of nuclear reactors) all play a role here. In this note, we'll focus specifically on inventory and price developments.
European Gas inventory remains below the low-end of its 5-year range, a territory it entered in mid-2021. It's making progress towards the bottom of the range, up to just -7.7% below the 5-year low, an improvement from the prior -9.5%.
Nothing particularly worthy of celebration however...
Despite some recent sequential acceleration, storage dipped again to -26% year-over-year (down from -25% YoY the previous week.)
It's a sticky situation for Europe. Particularly as inflation grips consumer wallets across the continent. A slight downturn in Eurozone CPIs doesn't help much on the ground level, as decelerating from 6.5% YoY inflation increases to 6% really doesn't matter much to a middle-class household.
Why is natural gas' flow through to the broader European economy worrisome? Well, Eurozone CPI definitely has central bankers spooked...
European Central Bank President Lagarde spoke following the ECB's Rate Decision today, in which they left policy unchanged... However, she did signal a potential for tightening at the March meeting, sparking traders into action; markets went from pricing in 10 bps in hikes through year-end to pricing in a 10 basis point hike by June.
It remains to be seen if Lagarde will truly Icarus-away her dove wings, but markets certainly began preparing for the melting immediately.
This came on the back of the Bank of England's decision earlier in the morning, in which they traded to majorly hawkish at their January meeting, raising rates 25 bps to 0.50% in a 5-4 vote. (The UK is not included in the Eurozone, but its economy is heavily-influenced/integrated regardless.)
Notably, every dissenter did so because they wanted a 50 basis point hike to 0.75%. The BoE also raised their immediate & intermediate-term inflation expectations significantly, increasing forecasts by about 1.2% across short to medium-term durations. Moreover, they're discontinuing asset purchases, and will begin to shrink their $875 billion Balance Sheet in March by no longer reinvesting their Gilts.
So, for now, gas prices & inventory are playing a not-insignificant role in influencing Central Bank policy as it fuels European inflation.
We'll keep you updated as the situation progresses/resolves (or doesn't resolve). In the meantime, keep natural gas on your radar (if it isn't already, which it probably should be.)
