Susannah Streeter, chief investment strategist at Wealth Club, examines how fears of a prolonged energy crunch are fading as oil prices fall back, while Europe faces a fresh challenge from soaring electricity demand during an intense heatwave.
Susannah Streeter, Chief Investment Strategist, Wealth Club:
‘’Fears of a long-lasting global energy crunch induced by the Iran conflict are slinking away, with oil prices sinking back towards pre-crisis levels. Instead of relief coursing through European markets, there’s still a big dose of caution as the knock-on effects of the record-breaking heatwave collide with concerns about weak growth across the region.
Brent crude has dipped to around $72 a barrel, close to levels seen before the US strikes on Iran. The chokehold on the Strait of Hormuz has been released, tanker traffic is flowing more freely, and supply concerns are fading. There’s still a long way to go to clear the backlog and fully meet demand, but with oil-producing nations turning on the taps and repairs to infrastructure ongoing, oil prices are on the decline. Energy efficiency measures adopted during the crisis, coupled with fears of slowing global growth, are contributing to the bearish outlook for the sector.
However, one energy shock is replacing another as far as Europe is concerned as it languishes under a punishing heatwave. Peak evening wholesale electricity prices have reached multi-year highs in several European markets this week. Offices and public buildings are cranking up cooling systems, while portable air conditioners and fans are being switched on as people try to cope with the record-breaking heat. At the same time, nuclear power production has been curtailed in France as river temperatures have risen, limiting cooling capacity at some reactors. Wind power production has also dropped as the persistent high-pressure weather system lingers over the continent.
With demand for electricity rising amid supply constraints, it’s pushing up costs for businesses and adding pressure to already stretched energy systems. The stress on the grid has prompted the restart of gas-fired power stations in the UK, with NESO, the grid operator, paying producers millions of pounds this week to help maintain comfortable reserve margins and avoid supply shortfalls.
The relatively subdued start expected for European indices compared with peers in New York and Asia may partly reflect concerns about the repercussions of the heatwave, as soaring wholesale electricity prices add another layer of pressure for businesses already grappling with a weak growth environment. The FTSE 100 is set to lag, as the tech-light make-up of the index means it won’t benefit as much from the surge in AI optimism, while energy giants may weigh on sentiment as oil prices continue their decline.
This volatile week has taken another twist, with stocks in New York set to surge after the sell-off earlier in the week. Worries that revenues wouldn’t keep up with soaring tech valuations have been put to bed, at least for now, by Micron’s results. The memory chipmaker beat expectations, with quarterly revenues surging and the outlook buoyant as demand for AI-related memory chips continues to accelerate.
Indices in Asia were awash with optimism as demand for chips powering the AI revolution shows little sign of slowing down. The Nikkei jumped sharply and South Korea’s Kospi rose strongly, boosted by news that memory chipmaker SK Hynix is planning to add a Nasdaq listing to raise money for expansion and tap into voracious demand for AI investments among American investors.
It’s striking while the iron is hot. The company now commands a valuation of more than $1 trillion, with its share price having more than quadrupled over the past year. It is the leading supplier of high-bandwidth memory, which has seen extraordinary demand as AI infrastructure spending gathers pace. Right now, it is viewed as a critical supplier to the global AI ecosystem. But technology moves fast, and it remains far from clear how long SK Hynix can hang on to its privileged position with a scarce, high-margin product before competitors catch up and erode its edge.”
