This week an interesting development in the correlation between electricity prices and natural prices caught our attention as seen in the below chart. Over the last 3 years we have seen the correlation between the two move higher and higher to a point where electricity prices are almost a mirrored reflection of what is going on in the gas markets.  

We have two key takeaways from this chart: 

1. Volatility in natural gas markets mean volatility in the energy component of the European inflation basket which leaves the Europeans with two options. Diversification of energy mix (Ahem, nuclear) and/or less electricity consumption meaning less wealth (If you believe that consumption has found a new equilibrium post price spikes) 
2. More fragility in the European energy systems. With the high reliance on natural gas, topics like French nuclear electricity production or Rhein levels will have an even larger impact.  

Chart 1: Electricity and natural gas correlation moving higher and higher