Investor Anxiety Over Extended Iran War Drives Energy Gains and Broad Market Declines
The would-be oil crisis has yet to arrive. The natural gas crisis is firmly in place.
Oil prices rose again Tuesday morning, on the fourth day of U.S. and Israeli attacks on Iran and ever-widening Iranian strikes in the Persian Gulf region. But gas prices far outpaced them.
In London trading, Brent crude was up 5.6 per cent, to US$82 a barrel, extending the two-day rise to more than 10 per cent and lifting the 12-month gain to almost 15 per cent. Gas prices blew through the roof. The European price, known as TTF, the benchmark for gas traded at the Netherlands hub, was up some 30 per cent in the morning after gaining almost 50 per cent the day before.
Several 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.”
The escalating energy prices – with 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. Investors seem have have lost confidence that the conflict will be resolved quickly.
In London, the FTSE 100 index was down by 2.5 per cent in mid-morning trading in spite of its heavy weighting in oil and gas shares, which climbed.
Germany’s DAX was down 3.3 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. In Germany, benchmark two-year Bund yield’s were 0.1 percentage points higher, at 2.16 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 kms 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 liquefied natural gas (LNG), passes through the strait, then on to Asian and European markets.
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.”
No LNG ships have crossed Hormuz since Saturday. 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. The Iranian Red Crescent Society said that more than 500 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 also ramped up its attacks on Lebanon, hitting Hezbollah strongholds in southern Beirut. The Israeli military issued dozens of new evacuation orders in Lebanon on Tuesday. The U.S. embassy in Riyadh was hit by two 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).
This article was first reported by The Globe and Mail
