QatarEnergy's liquefied natural gas production facilities, in Ras Laffan Industrial City, Qatar, on Monday. The company shut output on Monday after its production site was hit by Iranian drones.Stringer/Reuters
Investors’ apparent confidence in the Middle East war ending quickly evaporated on Tuesday as Israeli and American warplanes launched fresh attacks on Iran, and Israel invaded southern Lebanon.
The markets were rattled from the onset of European trading in the morning, on the fourth day of the attacks on Iran and ever-widening Iranian retaliatory strikes in the Persian Gulf region.
In London trading, Brent crude was up more than 7.5 per cent by mid-afternoon, to US$83.50 a barrel, extending the two-day rise to 13 per cent and lifting the year-gain to almost 17 per cent. But gas far outpaced oil’s rise.
Live now: North American indexes fall as Middle East conflict stokes inflation worries
The European price, known as TTF, the benchmark for gas traded at the Netherlands hub, was up some 25 per cent after gaining almost 50 per cent the day before. Gas prices in Asia, which is highly dependent on liquefied natural gas (LNG) from the Persian Gulf states, jumped 65 per cent.
Economists have warned that sustained high prices for oil and gas could provoke inflation, making it less likely that central banks in the U.S., Canada, Britain and the European Union will trim interest rates. Economists at Deutsche Bank on Tuesday said that “should energy prices stick at current levels, we would expect [Bank of England] rate cuts to slow.”
Capital Economics said that the latest oil and gas prices don’t, so far, constitute a crisis. “However, if oil moved into the $90-100 per barrel range on a sustained basis, this would intensify inflation pressures and likely prompt stronger DM [developed markets] central bank responses.”
Investors are shrugging off oil-shock risk too easily
The escalating energy prices – and no sign the war will end soon – sent stock prices down in Europe again on Tuesday, though at a quicker pace than the previous day.
In London, the FTSE 100 index was down by 2.7 per cent in afternoon trading in spite of its heavy weighting in oil and gas shares, which climbed.
Germany’s DAX was down almost 4 per cent. The DAX is stuffed with energy-intensive industrial companies, among them Mercedes, Porsche and Siemens, whose profit margins could get squeezed by rising oil and gas costs.
European government bond prices also sold off, boosting their yields (bond prices and yields move in opposite directions). In Germany, benchmark two-year bond yields were 0.11 percentage points higher, at 2.19 per cent, adding to a 0.08 percentage point rise on Monday.
The rising energy prices are a direct result of the effective closure of the Strait of Hormuz, the narrow channel – 33 kilometres across at its narrowest point – that separates the Persian Gulf from the Gulf of Oman and the Indian Ocean. Normally, one-fifth or more of the world’s oil and gas, in the form of LNG, passes through the strait, then on to Asian and European markets.
Tankers are seen off the coast of the Fujairah, United Arab Emirates, on Tuesday as the critical Strait of Hormuz was effective closed.Amr Alfiky/Reuters
In a note, ICIS, an independent commodities research firm, said “no LNG vessels have transited the Strait of Hormuz since Saturday, effectively cutting off around 20 per cent of global LNG supply. Although there is no formal blockade, tankers remain anchored due to heightened security and insurance risks, intensifying supply concerns.”
Various reports said 25 LNG carriers were anchored on either side of the strait. QatarEnergy, the world’s largest LNG company, shut output on Monday after its production site was hit by Iranian drones, though the damage appeared minor. Production is unlikely to restart as long as Hormuz is closed to ship traffic.
Israeli and U.S. warplanes attacked Iran overnight, and Israel hit Beirut on Tuesday morning.
The Iranian Red Crescent Society said that at least 787 Iranians had been killed since the war began on Saturday. Among the dead were many school children in Minab, in southern Iran. UNESCO, in a statement, said that the attack over the weekend had killed around 150 people and wounded 100. “Many students are believed to be among the dead,” the UN agency said.
Israel hit Hezbollah strongholds in southern Beirut and launched a ground incursion in southern Lebanon The Israeli military issued dozens of new evacuation orders in Lebanon on Tuesday. At least 30,000 people have been displaced in Lebanon, according to the United Nations.
The U.S. embassy in Riyadh was hit by two Iranian drones, triggering a fire. Iran’s Revolutionary Guards targeted a U.S. airbase in Bahrain, according to a statement carried by the official Islamic Republic News Agency (IRNA).