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Markets have been thrown into unimaginable turmoil by the global energy crisis.
Natural gas prices in Europe are at an all-time high. In China, the futures for thermal coal are at an all-time high.
Insider was provided with four options by Francisco Blanch, Bank of America.
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The global energy crisis, which has been triggered by a rising demand and an ongoing supply crunch, has caused unprecedented turmoil in the oil and gas markets.
Oil prices have risen more than 60% in the past year. West Texas Intermediate crude oil reached a seven-year high Friday.
The situation is worse in other parts of the world. The European natural gas market is at an all-time high, with spot prices tripling this year. The Chinese thermal coal futures have also reached all-time highs, and have tripled in value this year.
Insider was provided with four options by Francisco Blanch, Bank of America Global Commodities and Derivatives Research Chief. These are the paths Blanch sees for 2022. All of them promise prices to cool off, but some are more difficult than others.
1. An economic crash will be caused by a spike in energy prices
Francisco compared the energy crisis today to the rise in oil prices between 2007 and 2008.
Brent crude oil was $50 per barrel at the beginning of 2007. It nearly doubled to $95.98 per barrel by the end of 2007. Prices rose to an all-time high near $150 per barrel by July 2008. However, prices plummeted dramatically after the Great Recession.
Francisco stated that major industrial companies may have to reduce production or close down if there is a similar rise in oil prices again. This will eventually lead to a recession.
Surging energy prices have actually forced many businesses to stop manufacturing, particularly in Europe and Asia.
2. More production, substitution
Francisco stated that any producer will be forced to increase production or find cheaper alternatives if the price of any product goes up.
US shale companies have so far indicated that they intend to invest more in domestic production next year. They don't seem ready to unleash an oil flood as their investment is constrained by bigger shareholder returns.
Some companies are switching to oil as the prices of natural gas and coal rise. According to the International Energy Agency, this could add approximately 500,000 barrels per day to global demand.
3. Warm winters will temporarily solve the problem
The global energy market is experiencing a rise in prices ahead of winter when there is a spike in demand for natural gas and coke to heat homes. While energy prices are high, buyers around the world are competing for a limited supply. On October 13, the US Energy Information Administration warned Americans that they should be prepared for a higher heating bill.
What if it suddenly turns out to be a warmer winter than we expected? Francisco stated that the problem would be temporarily solved if demand falls.
4. An increase in interest rates will slow down aggregate consumption
Francisco stated that there is a possibility that the central banking will slow down aggregate demand. This will allow for slightly higher interest rates and less quantitative easing which will slow down overall growth and energy consumption.
Federal Reserve officials already indicated that they would reduce bond purchases later in the year and increase rates next year as long as the economy recovers and inflation remains high.
You can print US dollars, euros and Philippine pesos. He said that commodities cannot be printed.
