- Europe’s soaring energy prices are a glimpse of what’s next for a range of commodities, Goldman Sachs said.
- Benchmark gas and electricity prices in Europe have exploded as supply struggles to keep up with surging demand.
- Goldman Sachs said the S&P GSCI commodities index is likely to rise 11% over the next 12 months.
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The sky-high prices in Europe’s energy markets could well materialize in a range of commodities markets around the world as their inventories are depleted, Goldman Sachs has said.
Wholesale natural gas and electricity costs have surged to record highs in Europe, as a rise in demand from the reopening of pandemic-hit economies coincides with supply getting snarled up by a number of factors.
The price of European natural gas futures traded in the Netherlands has risen more than 450% over the last year, to stand at a record high of 60.63 euros ($71.39) per megawatt hour, according to Bloomberg data. UK gas prices have also soared to a record high, as have German and French electricity prices.
The price crunches could soon become more widespread, Goldman analysts said in a note Monday.
“European energy pricing dynamics offer a glimpse of what is in store for other commodity markets,” the analysts, including head of commodities research Jeffrey Currie, wrote.
They said the combination of falling inventories and the reopening of the global economy is likely to boost price volatility as “markets struggle to balance strong demand with sticky supply.”
Goldman said it expects the S&P GSCI commodities index to return 11% or more over the next 12 months. The index is dominated by oil, and it includes a heavy weighting of gold and agricultural products such as corn.
The US has also seen natural gas prices rise sharply, and the benchmark Henry Hub price is at its highest level since 2014. WTI crude oil breached $70 on Monday as supply struggled to rebound from Hurricane Ida.
Goldman’s analysts said inventories in nearly all physical goods, from US cars to Chinese copper cathodes, are declining sharply as pandemic restrictions lift, and people go out and spend.
“These markets are becoming increasingly exposed to any type of supply disruption (like Russian gas exports) or unexpected demand increase (like hot weather),” they wrote.
Limits to how much of a commodity can be supplied – due to labor shortages or bad weather, for instance – mean that demand will have to drop for markets to balance themselves out.
“As commodity markets are now unable to react to the first leg higher in prices through greater supply, once inventories are exhausted like in European gas, then demand destruction via sharply higher prices is the only option to rebalance markets,” they said.