The ECB’s path seems plagued with difficulties. First of all, the arrival of Trump and the reinflation that his tariffs and measures may bring have already paralyzed the Fed in its path of easing, leaving a really complicated balance for Frankfurt. While the central bank has to juggle a weakened economy, a falling euro against the dollar, tariffs… A new front opens in what seemed like the last act to definitively tie prices: the energy.
The price of gas and oil has come back to life after a period in which it finally seemed under control. The energy situation of the old continent with the war in Ukraine has been one of the great keys to understanding the inflationary awakening that the ECB has had to live with in recent years. Now energy becomes a problem at a delicate time. At least that is what the Council member has defended, Robert Holzmann, during an interview with Bloomberg at the Davos forum. During the meeting he explained that he is concerned about a “risk of reinflation” derived from “a depletion of gas reserves and the end of the last Russian gas pipeline that passes through Ukraine.” Two problems that “threaten to cause energy prices to remain high.”
Gas prices have clearly risen for several reasons, beyond the fact that direct shipping through the Soyouz gas pipeline has been cut, which passes through Ukrainian territory, Moscow’s last direct link with the old continent. Colder than expected temperatures and renewable production sunk by the ‘dark calm’, a meteorological phenomenon that paralyzes wind generation from November to January, have caused reserves to be emptied much faster than expected. This, added to a greater demand worldwide has caused analysts to worry about the high prices that Europe will have to pay to fill its saddlebags for the summer, where it will compete with Asia mainly to cushion the enormous demand of the summer period. A ‘premium’ that will have its impact on inflation.
But it’s not just a gas problem. The oil, which seemed trapped in a surplus thanks to the powerful production of the US and other countries such as Canada, Guyana… etc., have also abandoned this disinflationary role by surprise, as the US has imposed a powerful round of sanctions on Russian crude oil.
This is, at least, what the experts at Pantheon Research think. In his latest report, Claus Vistesen, an analyst at the firm, commented that although the trend for this month of January in the eurozone CPI is biased downwards, the reality is that “the risks lean upwards for general inflation due to rising prices of oil and the risk of one-time price adjustments in other utility rates in response to rising gas and electricity prices in 2024.”
In short, these two fronts that seemed muted now emerge with great intensity. From Gavekal Research they explain that “energy (as a whole) has already added 8%. Beyond the cold winter, the low inventories of the private and public sector and a unilateral positioning in the market.” The firm’s experts comment that both Europe and the US now find themselves facing a complicated impasse “or accept high prices, that generate inflation or begin to take steps to generate the image that they will ease the sanctions.
That is why energy will now play a decisive role in the upcoming meetings of the Fed and the ECB. From the very beginning of Trump’s term, on both sides of the Atlantic, gas and oil can make a difference between finally meeting the objective, or having to keep the price of money at its highest. At the moment the swaps market (OIs) continues to budget the same as last week: four cuts of 25 basis points for the ECB before June. However, experts are already warning that a skyrocketing electricity bill could change your plans.
The gas awakening
Reference gas prices in Europe (Dutch TTF) mark a price of 47.5 euros per megawatt hour. This represents 71% more than the range in which it was trading at this time, in 2024. These prices have gone completely in parallel with gas reserves on the old continent that continue to be emptied at a greater rate than had been seen until now. . The EU average as of January 18 shows warehouses 60% full according to data from Gas Infrastructure of Europe. To understand the difference, at this time in 2024 the continent’s tanks were at 74.82% of their capacity.
From Bank of America they are clear about what has happened and believe that the wake up from 23 euros per megawatt hour to be around 50 now comes from multiple reasons. “The market faces several uncertainties as the region heads into the colder winter months.” First, “the loss of gas from the Russian pipeline through Ukraine could leave the market with a deficit of 42 Mcm/d or 11 million metric tons of gas.” Secondly, “winter gas demand from northwestern Europe could increase by 14 million tonnes if temperatures remain as cold.”
All this mixed with a total collapse in wind production in the most exposed countries, such as the Nordics or Germany, which are victims of Dunkelflaute (a phenomenon in which there is practically no wind). The North American firm comments that in the coming months they expect the situation to continue to be complicated at a time when cold temperatures have forced Asia to look for as many LNG freighters as possible to go to its ports. ““The market is clearly indicating insufficient supply.”. S&P Global even said that with the arrival of enormous summer demand “a crisis could be triggered in the wholesale market like the one that occurred in 2022 (with the outbreak of the war in Ukraine).”
This will have a key impact if, as expected, it causes gas prices to rise or at least remain at current levels. According to the European Money and Finance Forum (SUERF), if a “shock” occurs, the worst-case scenario “can be generated a significant and persistent rise in inflation“. According to its latest study, a shock in gas supply has an impact of a direct increase of 0.85% in the CPI. The Center for Economic Policy Research (CEPR) commented that, according to its estimates based on gas prices energy from 2020 to 2022, each 10% increase in energy prices represents a direct increase of between 0.1% and 0.2% in the total OPC.
Oil enters the scene (again)
Oil promised to be an ally of the ECB this year, but things have quickly begun to get complicated, at least temporarily. From the beginning of 2025, the price of crude oil has shot up by 8 dollars to exceed 80 dollars per barrel, which has put central bankers on alert. The turnaround has been as sudden as it was unexpected, since all the bets spoke of a 2025 with excess supply and stagnant demand, a combination that promised to lower the price of oil even further. However, a much colder than expected winter in the northern hemisphere and renewed sanctions on Iran and Russia are turning the crude oil market upside down.
The International Energy Agency (IEA) has confirmed these fears in its latest report: demand is rebounding strongly and the cold threatens crude oil production in North America (USA and Canada). Which, together with the new sanctions against Russia, is skyrocketing the price of crude oil, whichand it already exceeds 80 dollars per barrel. It cannot yet be called a ‘perfect storm’, but this could be a major scare for crude oil consumers. Especially because reserve levels (inventories) are at very low levels.
Benchmark crude oil prices have soared in early January due to intensifying US sanctions on Iran and Russia, along with cold temperatures affecting large parts of the northern hemisphere. Brent futures hit a four-month highis after exceeding $81 per barrel in mid-Januaryan increase of 8 dollars per barrel compared to the previous month.
“The cold has caused global oil demand to suddenly regain momentum after several quarters of modest results, recording solid oil growth. 1.5 million barrels per day (mb/d) in the last three months. This was the strongest increase since the fourth quarter of 2023, and 260,000 barrels per day (kb/d) above our previous forecast. “A combination of lower fuel prices, colder weather in key regions of the northern hemisphere and growing petrochemical activity in the United States supported this increase in demand,” the IEA monthly report notes.
According to a report from the European Central Bank itself, a 10% increase in oil prices in euros can cause an increase of 1.5 percentage points in consumer energy prices within a period of six months. Since energy has a weight of 8-9% in the HICP, this assumes a direct increase of 0.1-0.2 points percentages in total inflation. These data are essential to evaluate the impact of variations in energy prices on the economic outlook of the eurozone.
“To understand the path forward for the ECB, it is useful to take a look at oil… as the price of crude oil has generally been a big turning factor”
The point is that there is currently an increase in the price of oil along with a fall in the euro against the dollar, which increases the price they pay at gas stations for each liter of fuel for Europeans. In euros, the price of crude oil has risen 12% since December, Therefore, the impact on the CPI would already be greater than 0.2 points in the coming months.
Deutsche Bank also pointed out this relationship or risk between price and inflation in the euro zone a few months ago in a comment published by Jim Reid, global director of economics and thematic research of the German entity. This Deutsche Bank economist assured that “to know the way forward for the ECB, it is useful to take a look at oilā¦as the price of crude oil has generally been a big driving factor in the ECB’s policy changes.”
Reid also mentions an article by his colleagues Peter Sidorov and Mark Wall which highlights “how much ECB policy has been linked to oil in recent years“, and given the great uncertainty that exists at the moment about the price outlook, especially given the geopolitical uncertainties, it is not surprising that the ECB wants to keep its options open.”
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