Iran conflict: the way forward for energy markets to remain resilient

The Iran conflict has again underscored the vital importance of the Middle East to global energy markets and economic stability. Dr Carole Nakhle, Founder and CEO of Crystol Energy and Secretary General of the Arab Energy Club, discusses the implications of the Iran strikes for global energy flow, oil prices, and infrastructure, as well as the possible macroeconomic effects and impact on investment sentiment.

How do you see the Iran strikes and the countermeasures impacting the global flow of energy?

What happened with all the attacks that we have seen unfolding in the last few days – and we don’t really see any end in sight at the moment – is definitely one of the worst case scenarios that energy market observers have been considering.

That said, they had allocated a high probability to such a scenario, because you wouldn’t expect to see all the American military build-up, which was the biggest since perhaps invasion of Iraq in the Middle East, happen just to threaten Iran. So, definitely something was going to happen and we already saw the upward pressure on oil prices taking place around that period. And then suddenly we saw prices spiking as soon as the war started, when the market opened in reaction to what’s happening there.

So that is the most immediate effect; we are seeing upward pressure on prices. At the moment, there is a great fear factor included in the assessment of market conditions going forward. But, because we started the year in an environment where we were expecting a surplus this year, the panic for the oil market is partially contained at this stage.

And it’s the same thing with gas markets and LNG, although we have different pricing mechanisms for gas. There is certainly a big sentiment of fear in the markets today.

How well supplied is the market and what are the factors driving its resilience?

Well, oil prices are never about one incident. Of course, an incident in the Middle East is not the same as an incident in an oil and gas producing – let alone an oil and gas major exporting – region. But on its own, even if it’s affecting the biggest exporting region in the world, one incident does not dictate prices for a long period; they can cause disruption to prices, but they will not dictate them in the long term, depending on how sustainable that disruption is going to be.

If I take that disruption aside and I look at market fundamentals; the majority of market observers were expecting a surplus for this year, so we had lots of supplies and demand coming in. While it is still growing, it is not really booming, and there is plenty of spare capacity within OPEC+, but also you have the supply from outside OPEC+. SO if you take all these factors into consideration you will understand why prices, for example, at the beginning of this year, were at a multi-year low despite the tensions in the Middle East.

Now, bring in the war and the escalating situation, that might well change overnight if, for example, energy supplies are significantly disrupted in the region, and we cannot find an alternative supply; that could exercise further upward pressure on prices.

But there are also the strategic petroleum reserves. The IEA can call on its members to put more oil in the market. That’s why we are not seeing [yet] a kind of a panic that you would have seen perhaps in the 1970s or the 1980s. The oil market has structurally and fundamentally changed since then, and that’s why, even though we have a panic with an increase in price, we don’t have a full-blown crisis.

Do you think incidents like in Ras Tanura refinery in Saudi Arabia and Ras Laffan in Qatar can add to the volatility?

Definitely, because it started to show that energy infrastructure is becoming a target for retaliation from the Iranian side, and that is the big worry.

But, let me take you to a few years ago when also the facilities of Saudi Aramco were targeted by drone attacks. That caused an increase in prices, but then Aramco was able to fill the gap and restore the production of the facility, and that’s why we did not see a lasting effect in the market. It was just really a question of a day or two reaction of fear.

The worry today is whether this is going to be more the norm for the next weeks? Then the scenarios and the analysis change. So things could change suddenly if more critical energy infrastructure is attacked.

The landscape is evolving rapidly, but in broad terms what are macroeconomic impacts of this conflict?

We can have all sorts of scenarios here, but I would say the biggest question is, how long is the current conflict is going to last? The more this conflict drags on and widens, the more it is going to put a burden on global economic activity, and on global economic growth. And it’s not only because of the loss of trade opportunities, I’m also thinking about the human cost, in addition to affecting negatively investment sentiment, the social consequences.

So, there are all sorts of variables I would like to take into consideration, not just in terms of putting a value on how many barrels of oil are going to be lost. It’s a much bigger event and development that can rewrite the modern history of the Middle East. And given the importance of the Middle East to the global economy, that will have some serious consequences.