Global Energy Shock as Gulf Infrastructure Attacked and Strait of Hormuz Blocked
Surge in Energy Prices
European gas prices experienced a dramatic increase, soaring by more than 39%, with intraday peaks exceeding 50%. However, these levels remain significantly lower than those observed at the onset of the Ukraine conflict.
At the opening of the oil market, Brent crude, the international benchmark, surged over 13%, surpassing $82 per barrel. It ultimately closed the session up 7.26% at $77.74, approximately $15 higher than at the beginning of the year.
West Texas Intermediate, the U.S. benchmark, finished at $71.23, reflecting a 6.28% increase.
Impact of Iranian Attacks
The volatility in oil and gas prices is largely attributed to Iranian assaults on energy infrastructure in the Gulf region. On Monday, QatarEnergy, the state-owned energy company, announced a halt in its liquefied natural gas (LNG) production following attacks on two of its major gas processing facilities.
Earlier, the Ras Tanura refinery in Saudi Arabia, one of the largest in the country and operated by Saudi Aramco, was forced to suspend certain operations due to an attack that resulted in a fire. Additionally, a drone strike targeted an oil terminal in Abu Dhabi.
Strait of Hormuz Closure
Simultaneously, the Strait of Hormuz, a critical chokepoint through which approximately 20% of the world's oil and LNG is transported, is effectively closed. Andy Lipow, a market analyst, noted that while the passage is not technically blocked, skyrocketing insurance premiums have led major shipping companies to suspend their crossings.
Maritime security agencies reported multiple attacks on vessels in the region over the weekend. On Monday, Iran's Revolutionary Guards claimed responsibility for an attack on a tanker allegedly linked to the United States.
This blockade severely restricts oil exports from major producers such as Saudi Arabia, the United Arab Emirates, and Iraq, as well as LNG shipments from Qatar, the region's leading exporter. Lipow warned that each day of disruption results in 20 million barrels of oil failing to reach their markets.
Asian Markets at Risk
Asian countries are poised to be the most adversely affected, with over 80% of the oil and gas passing through Hormuz destined for these markets, according to the International Energy Agency. However, concerns extend beyond Asia, as the cessation of gas exports could have dire implications for Europe's energy security.
Eurasia Group highlighted the particularly low reserves in Germany, the largest gas consumer in Europe, as winter draws to a close.
Potential for $100 Oil
While oil-importing nations theoretically hold substantial reserves, with OECD members required to maintain at least 90 days of stock, a prolonged disruption in deliveries through Hormuz could see crude oil prices rapidly escalate to $100 per barrel.
The last instance of prices exceeding this symbolic threshold occurred at the beginning of the Ukraine war.
Kristian Kerr from LPL Financial warned that sustained high prices would exert upward pressure on inflation expectations.
Michelle Brouhard, an analyst at Kpler, noted that high oil prices could become a significant vulnerability for President Donald Trump, as Tehran may seek to maintain elevated prices to pressure Washington ahead of the midterm elections in November.
Such price levels would also impact global trade due to increased transportation costs and threaten the operations of Chinese factories heavily reliant on oil.
However, experts from Oxford Economics believe that a severe and lasting disruption is unlikely unless the conflict persists for an extended period.
Trump has indicated that U.S. operations could last 'four to five weeks,' while asserting that the military has the capacity to extend beyond that timeframe.
