Gas shortages and high utility costs could become more acute later this year
Recent developments do not change our view fundamentally, but MNCs should note that risks to the energy outlook have risen substantially. Executives should expect to see short-term price fluctuations on European energy markets and revisit their scenario planning to account for the potential, albeit still unlikely, for elevated energy costs across Europe for the whole of 2022.
German Chancellor Olaf Scholz halted the controversial Nord Stream 2 gas pipeline, following reports that Russia has sent forces into the breakaway regions of Luhansk and the Donbas. The EU is expected to introduce new limited sanctions, but harsher measures are still unlikely due to the risk of blowback. The UK has announced sanctions on five Russian banks and three high-net-worth individuals (HNWIs) linked to the Russian regime, hinting that more could be imposed if Russia makes further incursions into Ukraine.
Germany surprised markets with its tough reversing of its previously strong defense and retention of the Nord Stream 2 project. These developments do not fundamentally change our short-term energy outlook for Europe, as no gas was supplied through the pipeline. The geopolitical situation will, however, remain tense, which increases the likelihood that the problem of gas shortages and high utility costs will become more acute in November 2022. The recent uptick in gas futures also suggests that some energy producers are beginning to hedge against long-term gas price pressures. In the short term, while Northern European markets remain significantly more vulnerable to gas supply disruptions and will likely experience short-term volatility, governments in the region will retain the fiscal space to introduce support if needed. However, in the unlikely scenario that gas supplies to Europe are reduced by Russia, electricity prices will see a significant increase, despite Europe’s strategic reserves and warmer weather. Among Southern European countries, Italy is the most vulnerable to supply disruptions and rising prices. Although Italy recently introduced new measures to soften the blow of higher energy prices on households and firms, these measures won’t be sufficient to offset the pressure from a short-term spike in energy costs.
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