Crude & refined trading
- November 30, 2023
- Posted by: Tom Hedge
- Blogs
The attack on Israel on 7th October caused Brent crude prices to increase to USD 89 per barrel when the Asian markets opened the following Monday. Prices settled shortly after but stakeholders in the energy markets are sitting tight, watching how the Israel-Hamas war will affect oil and gas supply and price volatility in the Middle East and beyond.
As we have seen with the conflict in Ukraine, many nations are responding to such events by diversifying their energy mix and investing more in renewables.
In this article, we review the impact the Israel-Hamas War has had on the energy markets so far and some predictions for the near future.
How Has the Israel-Hamas War Affected the Global Energy Markets So Far?
The Middle East, rich in oil and gas reserves, has long been a pivotal area for global energy security, and conflicts in the region have historically led to fluctuations disruptions in supply and significant market volatility. Every conflict raises fears of supply chain disruptions, and now, we are faced with yet another unpredictable turn of events.
Aside from the initial impact on crude prices, Israel temporarily suspended production at the Tamar gas field which is used for domestic supply and for Jordan and Egypt. If a state of emergency were to be declared and shortages arose, natural gas could be allocated to meet consumer demand. Gas supply has since resumed, and oil flow has not been stopped so far.
Tightening of Sanctions Against Iran
The main concern, in terms of the broader, global impact, is how Iran and other countries in the region are implicated. If evidence arises showing that Iran has been directly involved in the attacks against Israel, new sanctions against Iran’s oil exports could be enforced.
With that said, China is a major importer of Iranian oil, with many so-called ‘teapot’ consumers (independent, non-state-owned refineries) being beyond the reach of the US and other western powers. The IEA expect Chinese oil imports to increase by 1.8 million bpd by the end of the year.
When the US assisted Israel against Egypt in 1973, Saudi Arabia enforced an oil embargo against the US and prices skyrocketed overnight. If the war spills over into surrounding nations, perhaps the consequences would be just as disruptive.
What’s Next?
The conflict could broadly impact recent international trade efforts that linked Asia to the Gulf and Europe. This might result in reduced trade collaboration and connections between Eastern and Western financial markets.
Israel’s plans to ramp up natural gas exports may also be disrupted. In addition, current supply could be disrupted on a broader scale; while Israel mainly exports to Israel and Jordan, one third of the world’s natural gas supply is transported through the Strait of Hormuz.
The cheapest way to channel gas to Europe from Israel is to via Turkey. The two nations’ improved relations in recent years would therefore help reduce Europe’s reliance on Russian energy, but the conflict has disrupted these plans, with President Recep Tayyip Erdogan taking a step back for the time being.
60% of India’s oil is from the Middle East, so India is now looking to diversify, seeking imports from the North America, South America, and Africa.
In Europe, EU officials are looking to prevent another energy crisis this year and have been meeting with other oil-producing nations including Norway, Algeria and Nigeria.
The World Bank’s Predictions
The World Bank has acknowledged that, even though the global economy is in a much better position to handle oil price shocks than it was in 1970s, the current situation (combined with the conflict in Ukraine) could push the markets into “uncharted waters”.
However, that’s only if the conflict escalates; if not, they say the consequences would be limited. Some sources have predicted that the probability of the conflict remaining ‘contained’ is 75%.
The World Bank states that, in a situation similar to the Iraq war in 2003, supply would reduce by 3 million barrels per day. As a result, prices would increase from 21% to 35% (USD 109 to 121 per barrel).
In a more disruptive situation which we could compare to the embargo in 1973, supply would reduce by 6 million barrels per day, with prices increasing by 56% to 75% in the beginning, at USD 140-157 per barrel.
Will Renewable Adoption Accelerate?
The IEA has suggested that the Israel-Hamas war will accelerate the transition to renewables. The Executive Director has cited the fact that we now have a range of renewable technologies at our disposal that we didn’t have back in the 70s, including wind, solar, and electric vehicles, potentially reducing the impact of this conflict on energy security.
With that said, various European countries have been backtracking on their plans to meet climate targets. For example, Sweden has cut funding for climate measures by EUR 22.17 million and introduced tax cuts on petrol and diesel. The government also replaced its 100% renewables goal with ‘100% fossil free’, suggesting an increased focus on nuclear.
Hungary has increased fossil fuel production and delayed the phasing out of coal, and Bulgaria may do the same.
On the other hand, the US and China recently agreed to cooperate on climate change and accelerate the adoption of renewables. Part of the plans are for China to reduce methane and nitrous oxide emissions, whereas they previously only had targets relating to carbon dioxide.
How ETRM Software & Energy Analytics Helps Traders Manage Volatility
With so many variables affecting global energy markets, having a robust analytics solution is the difference between gambling and accurate prediction – especially during times like these.
Energy analytics software takes in data from a wide range of sources, which is an important foundation for a robust and accurate predictive model. In addition, cloud based software ensures real-time analysis, providing the most up to date predictions in line with market fluctuations.
Our CTRM solutions are the best in class for managing real time positions and we provide a range of risk management tools, including what-if scenarios, portfolio analysis and value at risk (VaR) models, among others.
Conclusion
The Israel-Hamas conflict, much like other geopolitical events in the Middle East, has once again highlighted the volatility of global energy markets. Although the global economy is more resilient than it was during previous conflicts, the implication of surrounding nations may cause unprecedented effects. However, current predictions are that the conflict will remain contained.
This situation underscores the growing urgency for nations to diversify their energy sources, as evidenced by shifts towards renewable energy in response to market uncertainties. However, the transition to renewables is not without its challenges, with various countries backtracking on climate commitments despite situations such as that in Israel.
This complex landscape necessitates sophisticated energy trading risk management software that enables better forecasting, real-time analysis, and effective management of market volatility. To book a demo of any of our world class CTRM/ETRM solutions, contact us today.