Oil tankers cross the Strait of Hormuz, through which 20 per cent of the world’s oil passes, in December, 2018.Hamad I Mohammed/Reuters
Oil and natural gas prices jumped Monday, on the third day of U.S. and Israeli attacks on Iran, as tanker traffic in the Strait of Hormuz shipping lanes virtually disappeared and Iran targeted Saudi and Qatari energy sites. Global stocks slumped.
A drone attack forced the shutdown of Saudi Arabia’s Ras Tanura oil refinery, which has a capacity of 550,000 barrels a day, making it the biggest of its kind in the country.
At the same time Qatar closed its liquefied natural gas (LNG) production after two drones hit the facilities, the Qatari Ministry of Defence said. There were no casualties.
Qatar is one of the world’s top LNG exporters and a crucial supplier of gas to Europe now that Russian supplies have been largely eliminated. Qatar and the United Arab Emirates are the source of about one-fifth of global LNG supplies and their production passes through Hormuz on its way to Europe and Asia.
The Qatari LNG shutdown, combined with Hormuz’s effective shutdown, sent gas prices in Europe and Asia soaring by 30 per cent.
China warns of threat to ‘vital’ Hormuz shipping route as Iran war expands
In a note published Monday, ICIS, a commodities research firm, said that prices at the TTF natural gas hub, the virtual trading point for gas in the Netherlands, could triple to €90 per megawatt/hour assuming a 90-day shutdown of Hormuz.
Oil also climbed, but by a lesser amount.
By early afternoon, European time, Brent crude, the international benchmark, had climbed about 9 per cent over Friday’s close, taking the price to US$79 a barrel. In early January, before rumours of war hit the market, the price was US$60.
While oil’s rise was expected, the price has not reached crisis levels.
Oil prices jumped on Monday as the U.S., Israel and Iran stepped up their conflict in the Middle East, with attacks damaging tankers and disrupting shipments from the key producing region.
Reuters
In previous global emergencies, oil prices went far higher. Brent crude breached US$100 in late February, 2022, after Russia launched its full-scale invasion of Ukraine and reached US$130 a month later. In 2008, just ahead of the financial crisis, oil went to US$145, then crashed to US$40, when the deep recession hit.
It appears oil traders and investors are gambling that the narrow Strait of Hormuz, through which 20 per cent of the world’s oil passes, taking shipments from the Persian Gulf to the Gulf of Oman and on to the Indian Ocean, won’t stay effectively shut for long. Meanwhile, the global oil markets appear to be brimming with surplus oil and stockpiles, providing some price cushion.
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Tanker traffic through Hormuz, which is only 33 kilometres wide at its narrowest point, slowed to a trickle over the weekend after Iran’s Revolutionary Guards (not the government in Tehran) said that no ship would be allowed to pass through the straight, though some did.
Rising insurance premiums may be the bigger deterrent to captains. According to various reports, insurance prices for ships travelling through the Gulf had been about 0.25 per cent of the replacement cost of the vessel. They either have, or are expected, to climb by 50 per cent or more. Some ships may see their war insurance outright cancelled.
In afternoon trading, European equity markets were down, but did not plunge. In London, the FTSE 100 opened down by about 1.2 per cent. Germany’s DAX index lost close to 2.3 per cent. Futures for the S&P 500 dropped 1 per cent.
The banking and travel sectors were hit hard on the market. Airlines lost ground as travel throughout the Middle East, especially the Persian Gulf states such as the United Arab Emirates, all but stopped, stranding tens of thousands of passengers. IAG, owner of British Airways, was down about 7 per cent in morning trading. EasyJet, whose routes focus on Europe, was down less so.
Travel shares fell sharply on Monday as escalating conflict between the U.S., Israel and Iran disrupted flights around the globe, forced the closure of key Middle Eastern hubs and sent oil prices surging.
Reuters
Gold and silver rose as investors fled to safer assets. Spot gold prices climbed as much as 2.7 per cent, reaching US$5,400 an ounce. Last week, they climbed 3 per cent.
With no sign that the war will cool off in the coming days, analysts and strategists are warning against buying the market dip in the hopes that equities are set to rebound.
Strategists at Barclays advised clients to hold off diving back into a market gripped by uncertainties, such as the length of the effective shutdown of Hormuz.
“The risk-reward doesn’t seem compelling,” said Ajay Rajadhyaksha, Barclays’ global chairman of research. “If equities pull back enough (say over 10 per cent in the S&P 500), there is likely to come a time to buy. But not just yet.”