The markets were down 1% last week - continuing the much-needed breather after the steep four-week rise. The rise had started to raise questions around the longevity and rationality of the rally. Two fundamental reasons just gave it the needed-push resulting in the pause this week:
Increased fears of continued aggression by the Fed in increasing rates - because of conflicting inflation and jobs data
Fresh fears that the relief on inflation cooling off slightly may have been momentary. Natural gas prices are off the roof
Latest inflation data in the US and in India gave investors some respite, with growth in prices being a notch lower.
While falling food and fuel prices finally reflected in inflation numbers, there is one commodity which has been causing worries to rise. Natural gas! How?
Europe has been pretty vocal on reducing dependency on Russia for its natural gas supplies. Funny how, while Europe still depended on Russia for nearly half its has needs. Funnier how, close to winter, when Europe needs gas the most to keep houses warm.
Russia started to carry out maintenance activities on its Nord Stream 1 pipeline (the pipe that moves most gas from Russia to Europe), and the already short-supplied commodity sent jitters around global markets.
The result was a 14x jump in the price of natural gas - which is rather inelastic a commodity.
This puts Europe under an increased risk of recession
Natural gas accounts for a quarter of Europe’s energy needs. In an already inflationary environment, such a steep increase in the cost of electricity would add to disaster.
While Europe is currently facing hotter days, winter is coming! And that’s when Europe will utilise a lot of gas to keep homes heated.
Moreover, Europe has been trying to de-risk itself from Russian natural gas anyway. Take Germany for example, its dependence on natural gas decreased from 55% to 35%. But this was filled up by coal imports, which drove coal prices higher globally.
Either natural gas prices go up, or prices of coal go up. Either way, there is a scare around a new catalyst for inflation.
There are two sides for India on the natural gas situation; a good and a bad
The good - Natural gas accounts only for 6% of India’s energy basket, whereas it is a quarter for countries like the US. The electricity bill in India hence doesn’t get as impacted as that in the US
The bad - India consumes copious amount of urea (fertiliser), which is primarily made from natural gas. Moreover, we have to import most of the natural gas. Higher prices plus dollar strengthening = we know how it ends!