Photo by Martin Adams on Unsplash 

As Covid cases begin to climb once more, the world also has another crisis on its hands: the energy crunch. For weeks now, demand for oil, coal, and natural gas has skyrocketed as a result of resurgent economies, supply-chain issues, and even unusual weather conditions, causing energy shortages in the UK, as well as other advanced economies worldwide. 

Right now, investors will be eyeing commodities, which have been extremely volatile in recent months. One thing to note would be the fact that gas shortages, which spurred the crisis in the first place, have driven up prices elsewhere. The price of Brent crude in the US, for example, has been sitting at multi-year highs above $86 a barrel, while investors in Europe have seen crude and gas prices sitting just below all-time highs. 

At the same time, climate change concerns are rife. In many ways, current shortages have laid bare the fragility of global supplies, as countries attempt to shift from fossil fuels to cleaner sources of energy. Now, as central bank meetings and the COP26 summit all lie ahead, traders and investors will have a lot to consider when managing their portfolios – from rising inflation to the threat of winter pressures.

With so much to bear in mind, what events and market themes should investors have on their radar?

COP26

The upcoming COP26 summit on 31 October should be a prime consideration to investors as we approach the colder months. As global leaders revisit old commitments to reducing their carbon emissions, discussions will no doubt have a significant impact on the performance of various asset classes.

Given that gas shortages have led nations to turn to thermal coal and oil – not exactly the most sustainable energy sources – the summit will likely home in on investment in cleaner energy sources and new pledges to accelerate the phasing out of carbon. In particular, investors should note the pace at which leaders plan to pursue any changes in policy, as well as any specific avenues for investment. I would wager that the technology required to advance clean energy, transmission, and storage, among other things, will be a prime opportunity for investment.

While it is important for traders and investors to note that investing in emerging markets – especially energy stocks – can come with significant risks, COP26 will certainly be an event to watch, as world leaders grapple with the two-pronged challenge of climate change and energy supply-chain issues.

Stagflation jitters

Whisperings about dreaded ‘stagflation’ – the combination of rising prices, rising wages, low productivity, low growth, and rising unemployment – will also be high on the agenda for investors now, considering recent CPI data. The first thing to consider here is the concern that rising energy bills could contribute more generally to rising inflation. Meanwhile, energy rationing and tightening consumer budgets may also have a part to play, hindering global growth. This is a problem for one chief reason: spiraling energy prices may stifle the global economic recovery from Covid-19.

By and large, investors should turn to central bank meetings to get a better handle on where inflation is headed. Back to where the energy crisis first reared its head, inflation has stabilized ever so slightly in the UK, with consumer prices rising to 3.1% in annual terms in September. From here, traders and investors expect that the Bank of England may raise rates at their next meeting on 4 November to bring inflation to heel. Meanwhile, in the US, the Federal Reserve are comparatively dovish, as plans to raise rates remain on hold until 2023, despite the annual rate of inflation creeping up to a 13-year high of 5.4% in September.  

Another factor that warrants some consideration is the fact that oil tends to have a significant impact on the currency market. It has a strong inflationary component, meaning that any swift changes in the price of oil will also likely have considerable repercussions in the FX world, too. 

Right now, key economists continue to assert that the energy crisis is transitory. While this may be the case, investors would be wise to keep up to date with any fluctuations with oil – an extended period of instability may prompt central banks to act to keep market volatility at bay.

Markets snowed under?

Finally, it may seem trivial to note, but given the nature of the current energy crisis, many investors have reason to believe that the winter season might mean trouble for the markets. 

As it currently stands, meteorologists are predicting a colder than usual winter for the UK, which could result that gas shortages and severe market shocks, as UK gas storage levels are overshadowed by stores in neighboring European countries. This eventuality could drive prices higher for an extended period, so will be another area for investors to monitor in the coming weeks and months. 

On the contrary, a milder winter would be preferable, keeping levels manageable and allowing supplies to be restored. No doubt, investors will be watching the weather.

For the most part, the current energy crisis comes as a result of various short-term causes and supply bottlenecks. While we may be in for a long, cold winter, there will still be many factors at play in the weeks and months to come, so traders and investors should keep their eyes peeled for any sudden changes.