Why escalating violence in the Middle East isn’t pushing up gas prices. Yet
Analysis by Anna Cooban, CNN
London (CNN) — Not that long ago, the closure of one of the world’s most important trade routes would have pushed households’ energy and fuel bills sharply higher.
So why, then, in the midst of a crisis in the Red Sea, with tankers of oil and liquefied natural gas (LNG) forced to take much longer routes to their destinations, have energy prices barely reacted — or even declined — over the past few weeks?
Europe imports most of its natural gas, but the price of the benchmark gas contract has fallen 28% since early December when Iran-backed Houthi militants began ratcheting up attacks on shipping in retaliation for Israel’s war against Hamas.
In recent days, tensions have escalated further with Iran and Pakistan conducting strikes on each other’s territory, and as Iran’s allies and proxies in the Middle East — the so-called axis of resistance — launch attacks on Israeli forces and its allies against the backdrop of the war in Gaza.
The prices of a barrel of Brent crude, the global oil benchmark, and West Texas Intermediate, the US oil benchmark, have barely moved. They’re up around 4% since early December.
American motorists aren’t seeing much difference at the pump either. The average price for a gallon of regular gas stood at $3 Tuesday, according to AAA. That’s the same as a month ago, and 8% down from the same time last year.
“The (oil) market basically doesn’t get as excited as it used to because it knows that most of these tensions don’t really, necessarily lead a reduction in supply,” Homayoun Falakshahi, a senior oil analyst at data provider Kpler, told CNN.
Rewind to 2022, in the aftermath of Russia’s full-scale invasion of Ukraine, and global energy markets were trading on a hair-trigger, when the slightest sign of further geopolitical unrest would cause the prices of oil, gas and other commodities to shoot up.
Now, however, analysts say economic factors — weaker demand in countries such as China and Germany, ample oil and gas supply — are superseding concerns about violence in the Middle East. For now, at least.
‘Substantial’ oil surplus
According to Kpler data, between 10% and 12% of global crude exports, and between 14% and 15% of exports of oil products, such as gasoline and diesel, ordinarily travel through the Red Sea.
In recent weeks many of those tankers have had to take a longer route to avoid the waterway. But they are still reaching their customers, according to Falakshahi.
“It’s really mostly a crisis in the supply chain, we haven’t lost volumes (of oil),” he said. “You have some tankers that have to go around the Cape of Good Hope (in South Africa). But in the end, the volumes remain the same.”
While supply remains robust, global growth in demand for oil is weakening.
China’s National Bureau of Statistics confirmed this week that the country’s economy expanded by 5.2% last year. That beat government projections but is still one of China’s worst economic performances in over three decades.
Global oil demand growth is expected to almost halve this year, the International Energy Agency said in a report Thursday. At the same time, global oil supply is forecast to hit an all-time high, driven by record output from countries including the United States and Canada, the IEA said.
That’s despite several deep cuts to output by the Organization of the Petroleum Exporting Countries (OPEC), plus a few allies including Russia, announced last year in an attempt to buoy prices.
Should the OPEC+ alliance follow through with its plan to unwind some of those cuts during the second quarter, strong growth in production from other countries could result in a “substantial surplus” of oil globally, the IEA said.
Still, Falakshahi believes the disruptions in the Red Sea will last “for months” and expects the price of Brent to tick up past $80 a barrel in the near future as markets come around to the same view.
The price could rise as high as $85 a barrel over the next few weeks, he said, and would surge higher only if the conflict in the region escalated significantly, perhaps in the unlikely event that Iran became involved more directly.
‘Robust’ gas supply in Europe
Meanwhile, Europe’s efforts to wean itself off Russian gas since early 2022 — by finding alternate supplies, ramping up its capacity to receive LNG, and filling up its storage facilities — are paying dividends.
Xi Nan, a senior gas researcher at Rystad Energy, said current historically high levels of stored gas were the “defining factor” keeping its price in check in Europe.
The European Union’s gas stores were 78% full Tuesday, the last day for which data is available, according to Gas Infrastructure Europe. That’s well above the average of 63% the bloc notched on the same day between 2017 and 2021.
In the past few days, several ships carrying Qatari LNG destined for Europe have bypassed the Red Sea to travel around the southern tip of Africa, according to an analysis by Kpler shared on X.
But Nan’s assessment is that Qatari LNG “is just taking a longer route, around 10 days more.” “The market now is not at risk of any shortage of supply,” she told CNN, adding that all other sources of natural gas, including US sources, were “robust.”
Qatar supplied a little over 5% of gas demand in Europe last year, a measure that includes the United Kingdom, based on data from consultancy Wood Mackenzie.
Nan said relatively modest demand was also helping to prevent spikes in gas prices. Broad swathes of Europe’s power market are now supplied by renewable energy sources, rather than gas, she said, and industrial consumption is low compared with before the start of the war in Ukraine.
The-CNN-Wire
™ & © 2024 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.
