Positive inflation news as wholesale energy prices drop and crude oil tumbles

Wholesale energy prices dropped by almost €10 per megawatt hour (MWh) and crude oil tumbled.

There has been some positive inflation news in the past week amidst banking turmoil and another European Central Bank interest rate hike as wholesale energy prices dropped by almost €10 per megawatt hour (MWh) and crude oil tumbled.

However, it may be a while before the drop in energy prices trickles down into the economy as annual food prices in the eurozone climbed 15% in February, as prior energy costs drove up prices.

Inflation across the services section of the eurozone also rose, partly driven by wage increases, president of the ECB Christine Lagarde said.

She added that rising wages and falling energy prices “will partly offset the loss of purchasing power that many households are experiencing as a result of high inflation”.

“This, in turn, will support consumer spending,” she said at a press conference as she introduced a sixth interest rate in less than a year to stifle inflation. 

Gas prices

European gas prices are set for one of the biggest weekly losses since the end of last year as mild weather curbs demand, and supply concerns ease.

Above-normal temperatures are forecast in the final two weeks of the heating season. That will take pressure off of storage sites.

Storage facilities are now about 56% full, which means less gas than usual will need to be replenished over the summer.

Prices for gas to be supplied in April fell nearly 3% to €42.67 per megawatt-hour, and marked a significant drop from €79 at the start of the year.

The fall in gas prices is expected to provide some relief to governments as it will give them some breathing room to ease up on energy supports.

Oil prices

Meanwhile, oil headed for the biggest weekly decline in almost a year after investor confidence plunged following the worst banking sector turmoil since the financial crisis.

The failure of Silicon Valley Bank and troubles at Credit Suisse, compounded by oil options covering, triggered a rout that sent prices to the lowest in 15 months.

Brent crude futures fell by 76 cents, or 1.02%, to $73.94 a barrel.

OPEC+ will likely sit tight and monitor the market unless Brent drops below $70 a barrel for a sustained period, according to industry consultant FGE. Energy Aspects Ltd said the producer group will probably wait for financial markets to calm before deciding whether to react. OPEC+’s monitoring committee, which can recommend a change in production, is scheduled to meet on April 3.

Until this week, the oil market had been fluctuating in a relatively narrow range as traders tried to balance the outlook for a rebound in Chinese demand and fears of a global recession. While some bulls are still holding out for a rally later this year, the ECB's interest rate hike on Thursday renewed concerns over the economy.

 All eyes will be on the US Federal Reserve’s move next week.

 Additional reporting by Bloomberg