Natural gas shortages, which began as a European problem, are becoming more acute in Europe and are beginning to spread globally. Dutch TTF gas futures, the European benchmark, have surged nearly 500% in the last year. Asian liquefied natural gas (LNG) spot rates have likewise more than doubled in 2021, as competition from European buyers has driven a scramble for LNG and other fuels. Skyrocketing natural gas prices have caused a jump in electricity prices across Europe and are driving an increase in coal and oil prices globally as producers switch to other energy sources. The global run on energy has several causes. Last year’s cold winter left Europe with exceptionally low gas inventories. A jump in global manufacturing activity this year coincided with a perfect storm of energy production and distribution snags around the world—from nuclear outages in Europe to hurricane-induced shutdowns of LNG export terminals in the US. Russia is also likely squeezing supply in order to pressure Europe into operationalizing the Nord Stream 2 pipeline.

Our View

As the northern hemisphere enters winter, there is little question about whether natural gas prices will continue to rise—it is only a question of how bad shortages will get. In the best case, Europe lucks out with a mild winter, and a temporary decline in factory output in China eases acute pressures. In the worst case, severe winter weather could raise natural gas prices by an additional 400%, according to Citigroup market analysts, potentially causing power outages in Europe and further straining global supply chains. In all but the best-case scenario, energy shortages and distribution snags will have wide-ranging impacts on the global economy. Rising energy prices will drive higher producer and consumer inflation in most markets. Energy-producing markets will benefit from higher energy prices. Since natural gas is a key input in fertilizer production, natural gas shortages may drive higher food inflation.

Business Implications

Most multinationals across sectors and geographic markets will be affected by a higher energy cost outlook. Chemicals companies and firms operating in Europe will likely see the earliest and strongest pressures. If natural gas shortages become more acute and drive higher oil and coal prices, it will start to meaningfully affect the demand outlook for most of Asia and Latin America. North America, relatively abundant in natural gas, is more insulated; however, a worst-case scenario would still raise energy prices significantly and affect agricultural production. Firms should begin planning for a range of scenarios around a higher energy cost outlook, especially as they consider passing on already-high production costs through price increases. 

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