Energy crisis will unsettle markets throughout the winter
The unfolding energy crisis is one of the main headwinds for markets at the moment – and likely to stay throughout the winter. Years of under-investment in the oil and gas sector, strong demand after the reopening of the economies and limited supply e.g. by Opec created a global shortage of multiple energy commodities. Europe was hit hardest by the crisis due to rising tension related to the Nord Stream 2 pipeline, additional cost through the carbon system and various other local factors. In addition, Asia was able to oust European demand for US LNG, which left Europe with low inventories at the beginning of the winter season. As a result, the Brent oil price went up by more than 60% this year and the Dutch contract for natural gas rose by even more than 300%!
The current reporting season gives a glimpse into how businesses are responding to the challenge. Companies in the oil and gas sector mostly benefited from the price surge and used the windfall for share buybacks and higher dividends. On the other side of the spectrum, some companies e.g. in the chemical sector and aluminium producers are cutting production due to the excessively high input prices. The energy-intensive part of the industrial sector also looks vulnerable. Until now, some of those stories are anecdotal, but they may spread the longer prices stay high.
The current challenges in the energy sector are likely to stay throughout the winter season. Possible relief could come in form of higher oil and gas supply from the OPEC countries and Russia; however, the relevant players have so far resisted to add much additional supply. The energy crisis comes on top of other worries that prevail in the market: rising inflation, growth deceleration especially in China and uncertainty about the fiscal outlook in the US. These challenges motivated us to call our base scenario for 2022 “choppy waters”. At the same time, we also expect that other forces will support markets next year: the reopening theme might get one more leg up, monetary policy would remain expansive even in the case of some initial tightening, additional oil and gas supply might finally be added, US Congress may ultimately pass a revised version of the Biden plan and the supply chain disruptions may abate gradually over time. The coming months are set to be volatile, but the next year may ultimately surprise on the upside.
By Marco Willner, Head of Investments Strategy, Multi Asset, NN Investment Partners
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