The problem is gas, at least for Europeans, because oil, despite everything, is much calmer. The Israeli attack had been expected for weeks and prices had already fallen slightly. The price of oil, which attracts the most attention, had risen from annual lows of 72 dollars per barrel in September to almost 80, before falling back to 76 dollars in recent days. On Friday, the gas market predicted the crisis very well and, risking little with conspiracy theories, 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, thus bringing the total increase to more than 5 euros in the week, a new maximum, since last December.
The closing exchanges, for American oil Nymex and for London gas ICE, give very exhaustive signals about the state of affairs. They reflect the best available information that guides the buying and selling decisions of hundreds of thousands of traders, which has consequences for the 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, as a result of which prices per barrel remain low.
The fundamentals, however, are in favor, with Chinese demand only slightly increasing after two decades of driving. On the supply side, all countries are growing, with those in the Middle East, the southern Gulf, now allies of the West, having an enormous amount of unused capacity, close to 5 million barrels per day, a peak that in the past has always preceded price declines. It is surprising that production in the United States, with 12.3 million barrels per day, the world’s leading producer, is continuing to grow, 1 million more per year, 4 more than in 2016, when, with Trump just elected, prices fell to $30.
However remote it may seem today, the risk of an interruption in exports from the Middle East is still present. Of course, Israel has not bombed Iran’s oil infrastructure, which exports about 1.5 billion barrels per day, but the risk concerns the Strait of Hormuz, at the end of the Persian Gulf, theoretically under Iranian control, which, however, since the 1981 war with Iraq, has never managed to block it. Approximately 15 million barrels per day of oil exports pass through there, 15% of the total demand of 102 billion barrels. If it ever succeeds, prices would rise to $200, a remote possibility, but one that adds a slight premium, estimated at $5-8.
A little more delicate, at least for Europeans, is the issue of gas, because 108 billion cubic meters (BCM) exported by Qatar, the world’s leading producer of liquefied natural gas, plus another 8 BCM 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. The 116 billion passing through Hormuz are 22% of total exports, the ones that affect gas prices in Europe, which reached 44 euros on Friday.
Here, the efficiency of the market, if only because it is younger, 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 has not yet arrived, the war in Ukraine will soon be three years old and Europe remains the most exposed to energy geopolitics, despite Brussels’ policy statements on renewables, efficiency and diversification.
