The Oil Price Has a Safety Valve. Gas Doesn't
The impact of war in Israel on the global economy
might be clearer in electricity bills than prices at the pump.
The old reflex when tensions rise in the Middle East is to worry about oil.
But the bigger price moves this week have been in natural-gas markets, which
have no plan B when supply is hit.
Brent crude has risen 6% since Hamas attacked Israel last Saturday in an
assault that killed 1,300 people. Despite its immense human cost, the fighting
hasn't had any impact on the global oil supply so far, though that could
change if the conflict spreads, especially if Iran gets involved.
Meanwhile, Europe's TTF natural gas benchmark has surged more than 40% this
week. The Israeli energy ministry asked Chevron to stop production at the
Tamar offshore gas field, west of Haifa, because of the conflict. Also, a gas
export pipeline that runs to Egypt close to Gaza has been closed.
The shutdowns will have some impact on regional energy balances, and
potentially Egypt's exports of liquefied natural gas, if they go on for a long
time, according to Zongqiang Luo, analyst at Rystad Energy. But the effect on
global LNG supply looks limited. However, there was also a reminder this week
of how vulnerable energy infrastructure is as the world becomes more unstable,
when suspected sabotage caused a leak in a Baltic undersea gas pipeline. This
has made traders nervous.
Overall, the risks from a serious conflict in the Middle East are more obvious
for oil. If Tehran is officially connected with the Hamas assault, a crackdown
on Iran's crude exports is inevitable. Tehran's production has risen from
around 2.5 million barrels a day at the start of this year to 3.1 million
barrels a day in September, according to the International Energy Agency.
The extra supply has been very welcome in a strained oil market. The U.S. and
Europe have grown lax about enforcing sanctions on Iranian shipments, probably
to prevent the rising oil price from causing more inflation. But this would
have to change if relations between Israel and Iran deteriorate further.
Still, natural gas prices may be more volatile than oil because there is no
backup supply. The gas market is hobbled by the war in Ukraine, says Michael
Stoppard, S&P Global's global gas strategy lead. "We are missing around two
million barrels of oil equivalent from the gas market because Russian pipeline
flows are locked out. So we are heading into winter with an unusual lack of
spare capacity."
The world will consume around 4,070 billion cubic meters of natural gas this
year, and supply is roughly 4,080 bcm. When the market is this finely
balanced, even minor glitches can cause big swings. Meaningful new supply
isn't expected for another two to three years.
By comparison, the oil market has plenty of reserves, even if tapping them
isn't straightforward. OPEC has five million barrels a day of spare capacity,
according to the IEA. Saudi Arabia alone could quickly produce another three
million barrels if necessary. Riyadh needs crude to stay above $80 to balance
its budget, so won't open the taps yet. But if oil becomes so expensive that
demand begins to fall, an effect that might kick in at $110 to $120 a barrel,
the kingdom can open the taps to cool prices.
Gas markets do have some buffer, as European storage levels are at a record
high. Barring an extremely cold winter, there shouldn't be the scramble to
replace Russian pipeline gas with LNG cargoes seen last year.
Fresh volatility in the gas market could benefit European supermajors Shell
and BP, whose energy traders are skillful at turning price swings into
profits. It is tougher for households and companies that face continuing high
energy bills and central bankers trying to tamp down inflation. In an
increasingly volatile energy market, having no supplier of last resort is a
problem.