European natural gas prices hit all-time highs on Tuesday, dragging bond markets down, particularly in the UK, a sign that investors expect more economic damage.
European gas contracts for November delivery jumped 23% to € 117.50 per megawatt hour, down from just € 18 six months ago due to the prospect of supply shortages in the winter months. Prices in the UK have also skyrocketed, topping £ 3 per therm for the first time as prices have tripled in the past two months alone.
The latest price gains mean gas in the UK and Europe is now trading at over $ 200 per barrel of oil equivalent, nearly three times the price of crude, with inflationary effects threatening to spill over into the economy. gas-dependent economies for heating and power generation. Traders are now anticipating the UK consumer price inflation rate to spike to nearly 6% in April next year.
Tuesday’s surge in gas prices fueled a recent drop in bond prices, particularly in the UK where concerns about rising prices were most acute. UK 10-year government bond yields jumped to 1.09%, the highest since May 2019.
Eurozone and US government debt also weakened, with 10-year US Treasury yields hitting near last week’s three-month high as investors grew concerned about the inflation.
“Bond markets trade gas prices,” said Mike Riddell, portfolio manager at Allianz Global Investors. “The rise is so dramatic that it fuels these concerns about stagflation.”
Longer-term inflation expectations have also risen, extending a sell-off in gilts that started last month when the Bank of England said it could raise interest rates as early as this year.
But investors wondered if central banks could curb inflation driven by strained supplies in energy markets, which have spread from Europe to the rest of the world. Asia’s largest economies are also increasingly suffering the blow from record prices, including in coal markets, with China and India experiencing supply shortages.
The tightening in energy markets is, in part, the result of the rapid rebound in economic activity and demand for energy from the depths of the pandemic. But demand for gas has also increased in Asia, where governments are trying to reduce their reliance on heavily polluting coal. European domestic production has also fallen.
Russia, the largest supplier of natural gas to Europe, has also limited pipeline exports to long-term contracts only, despite clear signs that traders want more sales in the spot market to help fill the gaps. storage facilities.
Russian President Vladimir Putin on Tuesday called the situation in Europe “hysteria and confusion”, accusing the lack of supply of underinvestment in fossil fuels as economies try to shift to renewables .
Ukraine and other Eastern European countries have accused the Kremlin of attempting to “arm” natural gas supplies in an attempt to gain swift approval to start the Nord Stream 2 pipeline and as part of it. of a reaction against the push towards renewable energies.
Nord Stream 2 will transport Russian natural gas to Germany via the Baltic Sea, bypassing Ukraine, and has been the target of US sanctions until a deal between Angela Merkel and President Joe Biden earlier this year.
Soaring energy prices are also putting pressure on governments and policy makers in Europe. European Commission chief Ursula von der Leyen said on Tuesday that Brussels would consider setting up joint strategic gas storage facilities, warning against Europe’s heavy dependence on Russia for imports, while commending Norway for taking steps to increase gas production.
“We are very grateful to Norway for stepping up its efforts, but this does not appear to be the case with Russia,” said von der Leyen.
Brussels is under pressure to act in the face of record natural gas prices that have forced the governments of Spain, Italy, France and Greece to accept subsidies to protect households against higher costs.
Record wholesale prices have also led to the collapse of 10 UK retail energy providers since early August, requiring millions of customers to shift to other companies.
The cost of supplying gas and electricity to the average UK household for a year has climbed to over £ 1,800, well above the price cap of £ 1,277.