How will the energy crisis play out for investors?
The energy crisis is escalating, leading to supply shortages that originally came from the gas market, but now spill over into coal, oil and carbon.
As prices continue to grab the headlines and suppliers go bankrupt, a conflict between supply issues and post-Covid demand is only fueling the fire. Add to that the peak of COP26, along with the usual seasonal trends, and there are many factors that investors face when managing their portfolios.
So how will the energy crisis play out for investors?
In recent months, commodities have been extremely volatile, and in some regions the prices of coal, oil, carbon and gas have skyrocketed. In the United States, for example, the price of Brent crude has reached multi-year highs above $ 86 a barrel and investors are seeing a similar story in Europe, as crude and gas prices have held near highs. historical.
Today, world leaders are coming together and the climate regulation landscape is gathering momentum at a time when inflation is skyrocketing and global economies are trying to reduce their carbon emissions. At the same time, energy demand is expected to reach new highs during the colder months, in line with usual winter pressures. This begs the question: what should investors watch out for?
Is “stagflation” a concern?
First of all, it’s important to tackle the elephant in the room – inflation. Understandably, investors fear that rising energy bills may contribute to the grand dilemma of inflation, while energy rationing and tight consumer budgets could hamper global growth. I urge investors to take these risks seriously, as energy price inflation could dampen the global economic recovery.
Inflation figures stabilized slightly in the UK, where the energy crisis first started, with consumer prices hitting 3.1% year on year in September. Today, many investors expect the CPI numbers to continue rising, triggering a potential rate hike at the Bank of England’s next meeting on November 4 in an effort to bring the rate under control. ‘inflation. The U.S. Federal Reserve remains more cautious as rate hike plans are still on the table for 2023, despite the annual inflation rate hitting a 13-year high of 5.4% in September.
So what to do with all of this? For a commodity, oil in particular has a significant impact on the currency market, so this must be taken into account. It has a strong inflationary component, and any sudden change in the price of oil will likely have substantial implications in the forex world. While central figures maintain that the energy crisis is transient, it still is, and it will be something to watch out for as the inflation dilemma unfolds.
No doubt this will be food for thought, as rising inflation can cloud investment returns and cause central banks – even the Fed – to take emergency action to adjust to oil-related news. Watch this place.
COP26 – will carbon commitments deviate the markets?
As I mentioned before, the COP26 summit, which starts on October 31, will have a significant impact on the performance of the different asset classes. This is all the more true as the gas market situation has pushed up the price of thermal coal and oil – not exactly green substitutes.
Expect the summit to reconsider past commitments to phase out carbon and accelerate those plans – the pace at which leaders pursue these policies will perhaps be the most interesting point to watch. In many ways, the summit will likely encourage investment in cleaner energy sources, as well as the technology needed to advance clean energy, transmission, storage, among others. That said, traders and investors should be aware that investing in emerging markets, and especially energy stocks, can be particularly volatile.
Put simply, this will certainly be a date to circle on the geopolitical calendar, especially for investors to understand how world leaders are balancing the twin challenges of climate change and energy supply chain issues, so they can take factor this into their asset allocation.
A cold winter
More generally, colder temperatures as the winter season approaches could keep energy prices high. Currently, meteorologists are predicting a harsh winter for the UK, with a greater than normal risk of a long, cold winter for the UK.
While a milder winter may be manageable as supplies replenish, some experts have warned that the worst-case scenario could see gas shortages and severe shocks in the market, as storage levels of gas in the UK are eclipsed by stores in neighboring European countries. This eventuality could cause prices to rise for an extended period, so this will be another area for investors to watch for in the weeks and months to come.
Finally, it is important to note that the current circumstances largely reflect a set of short-term causes and supply bottlenecks. While the evidence suggests that the navigation may not be smooth, investors should watch these events carefully when developing their strategy.
See more – Investing in the clean energy sector