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The United States announced earlier this week that it will prohibit all imports of Russian oil and gas, while the United Kingdom indicated that imports will be phased out by the end of the year. The European Union intends to cut Russian gas imports by two-thirds, but its plan is less drastic, owing in large part to the EU’s reliance on Russian energy.
Natural gas accounts for roughly a quarter of the eurozone’s energy generation, while Russia accounts for roughly one-third of the bloc’s imports. Any further disruptions in gas imports could have a significant impact on eurozone economic output and inflation.
After Russian Deputy Prime Minister Alexander Novak warned that Moscow could halt natural gas exports to Germany and the rest of Europe via the Nord Stream 1 pipeline, natural gas has re-entered the spotlight. Natural gas is one of several commodities caught in the crossfire of the Ukrainian conflict, and if Russia suspends exports, the European economy could suffer.
The war’s supply-side risks have stoked extreme volatility in global commodity markets, with oil, nickel, and wheat all surging alongside natural gas in recent weeks.
By mapping physical gas supply constraints and upward price pressures into GVA (gross value added) effects in the Eurozone and the United Kingdom, we estimate that high gas prices could reduce Eurozone GDP growth by 0.6pp (percentage points) and the United Kingdom’s GDP growth by 0.1pp relative to our baseline forecast in 2022 if no further gas supply disruptions occur.
Due to Germany’s reliance on Russian gas, the impact is likely to be even greater (-0.9pp). If Russia suspends all pipeline exports, Eurozone GDP growth could fall by 2.2pp in 2022 compared to our baseline forecast, with significant impacts in Germany (-3.4pp) and Italy (-3.4pp) (-2.6pp).
If gas prices rise further as a result of the Russian gas pipeline shutdown, our headline inflation forecast could rise by up to 1.3 percentage points, with a significant pass-through into core prices. Expect a range of 22 percent to 90 percent for the October price cap in the United Kingdom under the three scenarios, indicating two-sided risk around our current assumption of 55 percent.”
The United Kingdom’s energy price cap will be reviewed in October by the country’s regulator. The prospect of further spikes in energy prices has fueled fears of a “stagflation” period, in which the global economy is beset by high inflation alongside slow economic growth and high unemployment.
Given Russia’s reliance on exports to Europe and its ever-shrinking sources of revenue elsewhere, BCA Research strategists suggested in a note Wednesday that a complete shutdown was unlikely.
Despite the fact that Moscow signed a new agreement with Beijing last month to supply China’s CNPC with an additional 10 billion cubic metres of gas per year, the new pipeline to carry these supplies will take two to three years to build.
It is predicted that there will be no further supply disruptions beyond the flow reductions that have been in place since last September, another in which gas imports through Ukraine will cease for the rest of the year, and a third in which all Russian pipeline imports to Europe will be halted until 2022.