We have covered a variety of subjects in this blog and principal amongst them has been some thinking around inflation, as we know that to be a key driver of monetary policy, i.e. interest rates. 5th grade economics...I said you never loose it!
So just what could be a driver of inflation? Well perhaps this week we might have had our attention to the price of Natural Gas [NG].
I must apologise for my lack of clarity because the term Natural Gas is very ambiguous. You can prove it to yourself by simply going to the favourite argument settler 'google' and typing Natural Gas price chart. The chart you are looking at is more than likely the price of NG for delivery to Henry Hub in Louisiana. Now type in this into google:- Dutch TTF Natural Gas. If you visit here often just look at the front month future, Oct '21 (TGV21). Looks rather different doesn't it? It certainly looks inflationary!
Many are asking just what on earth has created this remarkable issue? I asked a very good friend who should know a thing or two about the subject because he used to be Head of Natural Gas trading for a Tier 1 investment bank. He said:-
As a start China has had a hot (ie high electric demand summer), their domestic coal production has issues and with the drought hydropower is down - so they have bought coal and LNG, pushing up prices.
South America has been dry and cold again pushing up LNG demand.
Normally Europe/UK is the marginal place that producers (USA. Qatar, Australia etc) sell LNG but with all the other demand there are less flows.
Then add in Russian gas production issue and an ongoing argument about NordSteam2 pipeline from Russia to Germany.
Then in the Electricity market we have had very little wind and there are big nuclear issues - so the whole of Europe/UK is burning as much gas and coal as they can to keep the lights on.
So basically UK/European Gas and Electricity prices are at records and if you are a UK consumer on a floating price deal you are sunk
... and from a political perspective carbon emissions are sky rocketing - not exactly the Green narrative they have been selling.
Only good point is that prices are now almost high enough that utilities in Asia and Chemical feedstock will switch to oil freeing up some LNG - again not exactly very "green".
When you hear about all these small UK Energy suppliers going bust its slightly more complex again because you have to factor in how they have hedged their sales - have they bought the gas/electric is advance? Then as prices rise they will also be needed radically more capital to run their business (both cash flow financing and margining of forward hedges).