Market Update: Energy July 2022
21 July 2022

OVERVIEW

It is important to reiterate and emphasise the realities of Energy challenges in food production, and how this is a key driver of the price increases we’re currently observing.

The rationing of Gas during the winter in the EU remains a key concern, as this will make production during the post-harvest period extremely expensive. Also, the harsh reality is that this impacts (directly or indirectly) everything that we consume/buy/produce globally.

We can expect this to get worse before it gets better. As such, this will have a significant impact on commodities, below a few examples:

  • Expected that commodities will all be impacted in upward trend.
  • All commodities impacted due to transport, production, running factories etc.
  • Expected to exacerbate the inflation that we are seeing.
  • Costs in greenhouses/modified environments will be hit hard.
  • Options are to absorb or produce less – this will have huge impact on availability.
  • Processed products in general will be hardest hit – tomatoes is a key example (see previous market update).
  • Fertilizer prices driven up as a direct impact.
  • Reduction in planting areas is now a key fear.
  • Dairy market – cost of drying powder has increased (there is no alternative way)

BRENT CRUDE OIL

Brent crude oil went up 35% over the last 6 months – 102 USD per barrel – 58% YoY. There are several well documented factors for this sudden increase and the impact thereof:

  • High demand due to fewer supply options in the market.
  • Low inventory, below 5 year average and lowest since 2014.
    • Only estimated to recover in last quarter of 2022.
    • Pricing are currently moving down, but still higher than previous yearly averages.
    • OPEC members will not be able to reach targets.
  • Russia/Ukraine Conflict
    • We saw an immediate impact in February.
    • Daily price movement has driven volatility.
  • Sanctions
    • Retaliation sanctions.
    • US banned all imports of oil.
    • UK to phase out all imports by end of 2022.
    • EU Russian oil embargo – drop in Russian oil exports now lowest since 2020.
    • Reduced reliance on Russian supplies.
  • Market uncertainty
  • Recession fears

NATURAL GAS

  • Peaked at £431.9/100therm
  • There’s a reliance of natural gasses in the EU.
  • Russia is the top producer so the conflict in Ukraine had an immediate impact
  • Prices have continued to rise
  • US Natural gas rose from Feb – May 2022 by 81USD/100T (UP 25%)
  • This is still much cheaper than Russia
  • EIA Gas storage expected to be 9% below average in Q3.
  • Sanctions
    • US sanctions fully removed Russia
    • EU to be fully independent from Russia by 2030
    • No EU alternatives to Russian supply
    • Russia demanding payment in Roubles
    • Russia no longer supplying Poland, Bulgaria, Finland and Dutch/Danish companies as they won’t pay in Roubles
  • EU to ration energy in the winter – sourcing alternatives is now a must.

ELECTRCITY

  • Prices have risen in line with Gas with consumption expected to return to pre-pandemic levels.
  • UK exposed to global surge in electricity pricing, 38% rise in 4 weeks leading up to 13 July 2022 – £101.9/MWH – 278% up YoY (this has an indirect impact).
  • Below and to the right Italy’s electricity prices that have a direct impact on production.

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