The overwhelming military power of the West, in this case Israel backed by the United States, is such that the risks to oil exports are very low, so prices per barrel remain low.
The problem is gas, at least for Europeans, because oil, despite everything, is much quieter. The Israeli attack had been expected for weeks and prices had already fallen slightly. The price of oil, which draws the most attention, had risen from annual lows of $72 a barrel in September to almost $80, before falling back to $76 in recent days. On Friday, the gas market predicted the crisis very well and, risking a little conspiracy theory, the markets already knew something about the attack. Prices opened in the morning at 42 euros per megawatt hour (MWh) and rose during the day to 44, bringing the total increase to more than 5 euros per week, the new maximum, since last December.
The closing exchanges, for American oil Nymex and for London ICE gas, give very exhaustive signals about the state of things. They reflect the best available information that guides the buying and selling decisions of hundreds of thousands of traders, resulting in closing price. The excessive military power of the West, in this case Israel backed by the United States, is such that the risks to oil exports are very low, thus prices per barrel remain low.
The fundamentals, however, are in favor, with Chinese demand picking up only slightly after two decades of driving. On the supply side, all countries are growing, with the Middle East, the southern Gulf, now allies of the West, having enormous unused capacity of nearly 5 million barrels per day, a maximum since the past has always preceded price declines. It is surprising the continued increase in production in the United States, at 12.3 million barrels per day, the world’s leading producer, 1 million more annually, 4 more than in 2016, when with the newly elected Trump, prices fell to 30 dollars.
As far-fetched as it may seem today, the risk of disruption of exports from the Middle East is still present. Of course, Israel has not bombed the oil infrastructure of Iran, which exports about 1.5 billion a day, but the danger concerns the Strait of Hormuz, at the end of the Persian Gulf, theoretically under the control of Iran, which, however, from the 1981 war with Iraq, it never managed to block it. Approximately 15 million barrels per day of oil exports pass there, 15% of the total demand of 102 billion barrels. If it ever succeeds, then prices would rise to as much as $200, a distant possibility, but one that adds a slight premium, estimated at $5-8.
A little more subtle, at least for Europeans, is the issue of gas, because 108 billion cubic meters (Mmc) exported by Qatar, the world’s leading producer of liquefied gas, plus another 8 Mmc from the Emirates pass through Hormuz. Unlike the oil market, which has become much more liquid over the past 50 years with more diversification of producers, the LNG market is younger, with fewer exports and more concentration of supply. 116 billion passing through Hormuz is 22% of total exports, which affect gas prices in Europe, which reached 44 euros on Friday.
Here, the efficiency of the market, even because it is newer, is significantly lower. It is a problem for Europe, because the price of gas determines the price of electricity, which rises to €90/MWh in Europe. The return to the pre-war average of 50-60 Euros is still a long way off. Winter is not yet here, the war in Ukraine will soon be three years old, and Europe remains more exposed to energy geopolitics, despite Brussels’ policy pronouncements on renewables, efficiency and diversification.
