Thread by @wolf_vukovic

Natural gas prices have gone up 220% since March this year. Oil has gone up 140% in the same period (and 440% from its April 2020 trough).

Why is this happening? Time for a quick (14-tweet) thread. 👇🧵

1/ Commodity and energy prices are basically all following a similar trend. Huge post-COVID demand + limited supply and supply chain bottlenecks = high prices

(Econ 101)

Should you be concerned?

2/ Let’s start with #oil.

Oil turned negative at one point in April 2020, ending that week at $18 a barrel, but has since rebounded to over $80, causing shortages at gas stations and even price controls in some countries.

3/ However, we are used to seeing oil prices being volatile, as people understand they tend to go up due to surges in demand or with artificial limitations of supply (like during trade wars or politically motivated embargos).

4/ Same thing is with natural gas, as with all other commodities.

But with natural gas there is an additional factor, one particularly problematic in Europe: the winter is coming. A cold one.

5/ This is seasonal, the same thing happens every winter: higher demand increases gas prices throughout, in Europe especially.

Russia tends to use this sometimes as a bargaining chip against the EU (like during the war in Ukraine).

6/ This winter, a bit colder than the years before, more people are heating their homes for longer periods of time.

In addition to this usual spike in demand, there is the “inflation of everything“ phenomenon which makes the gas crisis a perfect storm for Europe right now.

7/ Btw, if energy companies would learn how to hedge against this properly and buy gas futures contracts in the summer to protect themselves, perhaps the spike in prices would be lower. Perhaps.

But why the surge in demand, and what’s COVID got to do with it?

8/ Think of it from the perspective of a production company.

Before COVID, production companies relied on keeping stockpiles of commodities.

When the pandemic started and trade flows stopped, the companies using these goods for production turned to their stockpiles.

9/ Many production companies continued working during lockdowns (people still needed to buy stuff, services they could do without for a while, but not food).

The biggest industry that halted production was the car industry, but most others did not go into lockdown.

10/ A lot of production companies in US and EU relied on getting their raw materials from China and East Asia, where supply chains have still not been restored, so they decided to shorten their supply chains and find other suppliers, more close to their domestic markets.

11/ Ever since the reopenings in 2021, production companies kept buying even more commodities for two reasons:

(1) to keep up with a rising demand for their products from the rest of the economy which is now recovering, and

(2) to once again fill up on their stockpiles.

12/ On the other hand, the new suppliers cannot handle all the new demand, so they contribute to delays.

To conclude, throughout 2021 we have huge rising demand for energy, commodities, and food, combined with limited supply and a broken just-in-time system.

13/ With gas prices, this is exacerbated by a cold winter that is pushing demand for natural gas even higher in Europe.

EU’s gas dependency on Russia has been a political issue for the past decade. It’s only getting worse in 2021.

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