Europes power prices are through the roof, and experts say this is a glimpse of what lies ahead for global commodity markets.
Gas prices have surged heading into the winter as demand for heating peaks. In turn, the surge is incentivizing power generators to return to coal. Meanwhile, industrial users are mulling temporary plant closures due to accelerated power prices.
In April, the price surge began as gas inventories dropped to below pre-pandemic levels (2015-2019), indicating a looming shortfall. At present, benchmark electricity and gas prices have spiraled upward due to supply shortages.
As a result of these exploring prices in Europes energy markets, Goldman Sachs believes this will blow up into a range of commodities markets as inventories tighten.
Europes power prices are out of control
The price surge across Europe has governments taking the heat. For example, Italys electricity prices have increased by 20% for the last quarter and are expected to spike 40% further in October. Elsewhere, Spains government is in crisis over the power prices that have tripped within the previous six months.
Europe is struggling with wholesale electricity and natural gas prices amid economic reopening that coincided with low supply. In the Netherlands, Bloomberg reports that the price of natural gas futures has climbed to nearly five times within the last year to $71.39(60.03 euros) per megawatt-hour. Moreover, in the UK, gas prices have spiked along with French and German electricity prices.
Goldman Sachs analysts predict that these price surges will continue to spread throughout the continent.
A glimpse into the future of commodity markets
Soaring European power prices offer a glimpse into what lies ahead for other commodity markets, explains Jeffrey Currie, Goldman Sachs head of commodities research.
In a note, Currie and other analysts opined that the double whammy of falling inventories and clamor to reopen the global economy would tend to induce price volatility. This is because markets will adjust to balance strong demand with sticky supply.
Goldman Sachs predicted that the S&P GCSI commodities index would spike 11% within the next 12 months. The index is heavily oil-dependent, with a sizable portion of gold and agricultural products.
Meanwhile, natural gas prices have also increased in the US, with its standard Henry Hub price on a record high since 2014. For instance, WTI crude oil has surpassed $70 due to supply snarls brought about by Hurricane Ida.
Analysts believe that markets will become overwhelmingly exposed to similar supply disruptions or unpredicted demand spikes in the future. There will be limits such as labor shortages or force majeure on how commodities will be supplied. As a result, demand will inevitably drop so that the markets can balance themselves out.
