In a recent analysis by Steno Research, Andreas Steno examines the potential drivers behind a surge in electricity prices in Europe during the upcoming summer. The research highlights the fragility of the European energy market, exacerbated by Germany's increased dependence on French electricity following the shutdown of German nuclear power and the discontinuation of Nord Stream gas.
Steno points out that France's reduced nuclear power output during summer, due to higher river temperatures affecting cooling processes, combined with a potentially hot summer, could significantly strain electricity supply and escalate prices. This scenario is made more likely as low current prices do not deter the use of air conditioning, increasing power consumption further.
Moreover, Steno discusses how increased electricity usage naturally boosts gas consumption, which might lead to a repeat of 2022's scenario where fears of insufficient winter gas reserves drove prices up. He recalls the dramatic price movements in the TTF last year due to strikes at LNG facilities in Australia, suggesting that small triggers can lead to rapid price escalations.
The analysis also considers global influences, such as potential increases in Asian demand for gas, which could impact European markets not just through commodity prices but also currency values. For instance, subdued LNG prices have allowed the Bank of Japan to maintain a weak yen policy without exacerbating energy inflation.
Lastly, Steno touches on the broader economic context, noting the persistent weakness in Europe's energy-intensive manufacturing industries, particularly in Germany, where indicators like the Ifo report predict continued downturns. However, there are signs of recovery in other regions, with U.S. and Swedish manufacturing data showing positive trends, which could herald a cyclical upswing in commodities later in the year.
Steno concludes by highlighting the Dallas Fed Energy Survey's findings on increased drilling costs in the Permian basin, signaling a return of cost-push inflation and suggesting a bullish outlook for broad commodities in the coming quarters.