We examine the implications of the present global energy crisis on commodities prices and inflation in this article
What is the nature of the world’s energy crisis?
In the face of rising demand, the present energy crisis is a disruption in the availability and supply of energy supplies to major portions of the global economy.
Which parts of the country are the most affected by the energy crisis?
The global energy crisis is now affecting major economies such as the United States, China, Europe, and India.
What is causing these areas to be impacted?
The current problem is being exacerbated by a variety of factors across countries.
The following are a few of these issues:
- Global energy demand has increased as a result of the post-Covid-19 pandemic global economic recovery.
- In China, power shortages have resulted from a chilly winter and hot summer, as well as economic expansion.
- China is currently accumulating coal and gas reserves at home.
- Western Europe’s gas supply has been restricted by Russia.
- India’s coal stockpiles are low and dwindling.
- Much of Europe relies on gas for warmth, and supplies are low as winter approaches.
- Oil output by the Organisation of Petroleum Exporting Countries (OPEC) increased little, falling short of projected future demand.
- Natural resource supply interruptions in the supply chain or logistics
What is the impact of the crisis on energy prices?
Coal, natural gas, and oil, among other fossil fuels, continue to meet the great bulk of global energy demands. These commodity prices are rising exponentially as demand outstrips supply.
As of October 21, the following are the year-to-date movements in these commodities:
Brent crude oil has increased by 63 percent.
+101 percent for natural gas
+179 percent for coal
What impact will the energy crisis have on inflation and the economy as a whole?
Higher energy prices lead to higher inflation in a variety of areas, including power, transportation, and food, both directly and indirectly.
In the United States alone (the world’s largest economy), consumer price index (CPI) data shows that inflation is now around 5%, despite the fact that the US Federal Reserve Bank (Fed) seeks price stability at about 2%. Higher inflation, if not temporary, will put downward pressure on monetary policy, i.e. interest rates. Rising interest rates, while intended to keep price inflation in check, can stifle economic development and, as a result, have a detrimental impact on employment.
Since October 2020, the monthly CPI inflation print has been shown in the graph below.
What is the duration of the energy crisis?
It’s impossible to say how long the present energy crisis will last. However, in the colder months, demand side energy estimates are greater, implying that difficulties might last until at least the end of this year’s US and European winter.
Supply chain bottlenecks, which influence not only commodities pricing but a wide range of items in general, are expected to last far into the new year and at least until the first quarter of 2022.
Technical study of Brent crude oil
Oil prices are continuing to rise in the face of limited supply increases, rising demand, and a worldwide energy shortage.
While Brent crude is in overbought territory, it remains solidly on an uptrend. We continue to seek for short-term declines in oil to locate long entry points, with longer-term upside objectives of 86.50 and now 89.00.
Technical analysis of natural gas
Natural gas has a long-term upward tendency. A pullback of this uptrend appears to have concluded in the near term, with a positive price reversal (circled blue). The stochastic indicator’s oversold indication supports the positive price reversal.
These positive technical indicators point to further advances, with 6030 as the first upside barrier objective. Long traders may choose to use a closure below the reversal low at 5000 as a stop loss signal for the trade.
Summary
- A worldwide energy crisis is now being exacerbated by a number of causes, including a post-Covid-19 pandemic economic recovery and supply chain disruptions.
- Globally, this has resulted in rising energy costs.
- Fossil fuels, such as oil, natural gas, and coal, account for the majority of global energy consumption, and as a result, prices have skyrocketed.
- The energy crisis is likely to last until the end of 2021 at the earliest.
- Inflationary fears are being exacerbated by rising energy costs.
- Higher inflation, if maintained, may have a negative impact on global economic development and employment by forcing central banks to tighten monetary policy more aggressively.