Week in Review: Energy Prices Soar

Rising energy prices are fast becoming a global problem with soaring demand driven by the robust economic recovery following the pandemic. This week global oil prices jumped to a three-year high trading above $85 a barrel on Friday, boosted by forecasts of a supply deficit in the months ahead. The price surge, including for other energy commodities and metals, is adding to the concerns of policymakers around the risks of higher inflation.

The Biden administration in reaction to the looming crisis has requested OPEC to boost oil production as well as consulting with the domestic oil industry to seek a remedy for the rising gasoline prices. The latest outreach is in stark contrast to the administration’s stated objectives of transitioning away from the oil industry with President Biden coming into office promising to accelerate the adoption of electric vehicles and renewables such as solar and wind power. Fossil fuels currently provide about 80% of America’s energy.

Gas prices have also been soaring in Europe and the UK, with increasing calls for Russia to increase gas supplies to the region. Critics argue that Russia is using its gas exports to the region for political purposes, chiefly in its bid to get Germany to certify the Nord Stream 2 gas pipeline, a major gas line which would double its capacity to send gas to Germany via the Baltic Sea.

Two more UK energy firms (Pure Plant & Colorado Energy) have ceased trading amid soaring wholesale gas prices. Pure Planet said it had been caught between rising costs and the UK's energy price cap, which limits what companies can charge consumers. The UK has some of the lowest amounts of gas storage capabilities in Europe, leaving the market exposed to the gas supply crunch.

Industrial metals are also benefiting from robust demand and supply disruptions due to rapid rises in the prices of gas and coal. Copper prices closed in on a 10-year high on Friday as industrial metals from zinc to aluminium rallied on growing concerns that the global energy crunch would hit production.

The U.S. Federal Reserve could begin reducing the pace of its current $120 billion monthly asset purchases as soon as mid-November, according to minutes released this week. The summary indicated that the tapering process could see an initial monthly reduction of $10 billion in Treasury’s and $5 billion in mortgage-backed securities. The target date to end the purchases should there be no disruptions would be mid-2022. The Fed next meets 2nd to 3rd November.

On the inflation front U.S. consumer prices increased slightly in September as food and energy price rises offset declines in used car prices. On a year-over-year basis, prices increased 5.4% versus the estimate for 5.3%. September’s rise in consumer prices demonstrates that supply chain issues, the energy crunch and robust demand are proving to be more persistent and less transitory than expected.

The People’s Bank of China said Friday that indebted developer China Evergrande is its own case, and that most real estate businesses in the country are stable. Property giant Evergrande has $300 billion in liabilities and the developer ranks second in China by sales. The risks posed by Evergrande are “controllable,” Zou Lan, director of the People’s Bank of China’s financial markets department announced on Friday. Zou added that authorities would protect individual consumers when it came to their house purchases and provide financial support for the resumption of construction.

In crypto news, the U.S. Securities and Exchange Commission is poised to allow the first U.S. Bitcoin futures exchange-traded fund to begin trading in a watershed moment for the cryptocurrency industry. ProShares looked set to offer the first bitcoin exchange-traded fund that is set to begin trading as early as next week, marking a major milestone in the crypto sector as digital assets gain greater mainstream adoption.

Better than expected third-quarter earnings from Goldman Sachs and chipmaker Taiwan Semiconductor Manufacturing lifted investor sentiment as strong corporate earnings offset fears of spiralling inflation and rising energy prices. There was also positive news for U.S. retail sales posting an unexpected increase of 0.7% against a market estimate of a decline of 0.2%. For the week the Dow Jones Industrial Average gained 1.58%, while the S&P 500 added 0.8%, and the Nasdaq Composite rose 0.5%.

Shares in Europe also rallied strongly on optimism around the continuing economic recovery. The pan-European Euro Stoxx 50 Index (+2.69%) closed up strongly for the week while the UK’s FTSE 100 (+1.95%) benchmark rose to its highest level in a year and a half. Japan’s stock market returns were similarly positive for the week with the benchmark Nikkei 225 Index rising 3.64%, as new prime minister Kishida retreated on plans to increase capital gains tax rates. The Shanghai Composite Index bucked the trend ending the week down 0.55% on the back of expectations that China’s economic expansion slowed in the third quarter, ahead of Monday’s official third quarter economic growth data release.

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Market Moves of the Week

The JSE traded firmer for the week as commodity counters performed strongly and global sentiment improved backed by strong corporate earnings. The rand also benefitted from the improved market sentiment trading at R14,61 to the U.S. dollar at the weeks close.

South Africa’s biggest engineering union Numsa has rejected a new wage offer as a national strike that has already hit output at car maker BMW enters its second week on Thursday, employer body Seifsa said. The strike was launched after wage talks hit a deadlock and arbitration failed, with Numsa demanding an 8% across-the-board wage rise in the first year, and inflation plus 2% for the second and third years. Seifsa had offered 4.4% for 2021, inflation plus 0.5% in 2022 and inflation plus 1% in the third year.

South Africa will start vaccinating children between the ages of 12 and 17 next week using the Pfizer vaccine, the health minister Phaahla said on Friday. Phaahla said that on the advice of its vaccine advisory committee the government would only give teenagers a single shot of Pfizer’s normal two-shot regime due to concerns that it may affect the heart.

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Chart of the Week

Global oil prices continued their climb to their highest level in over three years, pushed higher in part by expectations that utilities and other firms would switch to oil from natural gas due to the supply shortage in Europe.  There are growing fears that consumer demand will be undermined as a result of strains on household budgets from the energy cost spike.

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