How fragile is Europe’s gas supply?

Hi and welcome back to Energy Source, coming to you from London.

The war in the Middle East between Israel and Iran is still rumbling on, with Israel promising further “powerful strikes” against Iran despite overnight hopes of a ceasefire.

The oil market is now back to roughly the level where it was when the war began just over a week ago: after a heavy sell-off, benchmark Brent crude is below $70 a barrel.

If the conflict continues, the threat of Iran “closing” the Strait of Hormuz — the narrow waterway through which the Middle East ships its oil to the world — remains. There may continue to be disruptions to shipping in the Red Sea from the Houthi rebels in Yemen.

If you want to know more about the Strait, my colleagues Charles Clover and John Paul Rathbone wrote this article yesterday about the mischief that Iran could cause to shipping.

The conflict has already driven the price of shipping up substantially.

On Monday, my colleague Robert Wright found that the cost of chartering a very large crude carrier to sail from the Gulf to China rose by 25 per cent to nearly $78,000 a day. Before the conflict between Israel and Iran began on June 13, the cost was just $18,600 a day.

Many analysts have focused on what problems in the Strait would mean for oil, but it is also a key route for other commodities.

According to data firm Kpler, nearly 28 per cent of the world’s trade in minerals passes through the Strait, more than 16 per cent of the world’s fertiliser, 15 per cent of the world’s chemicals and so on.

The conflict has exposed again how reliant Europe is on imported gas, including huge amounts of liquefied natural gas (LNG), especially after losing imports of pipeline gas from Russia following Moscow’s full-scale invasion of Ukraine.

The price of gas in Europe was driven about 20 per cent higher by the fighting, fell heavily on hopes of a ceasefire, and is now rising again.

About a fifth of the world’s LNG trade goes through the Strait.

My colleagues on Lex have written about the risk to gas, but the Oxford Institute for Energy Studies also modelled the impact of a shut-off on Monday.

According to Mike Fulwood, a senior research fellow at OIES, some 80 per cent of the LNG from the Gulf countries of Qatar and the UAE go to Asia, primarily China, India, South Korea, Taiwan and Pakistan. The rest goes to Europe, particularly Italy, Belgium and Poland.

Each year, about 115bn cubic metres (bcm) of LNG is exported from the Gulf, a number that is roughly comparable to the 135 bcm of pipeline gas that Russia sent to Europe before the war in Ukraine began.

The shutting off of Russian gas from Europe caused prices to rise to $47 per million British thermal units (mmbtu). They fell back to about $11 per mmbtu before the current crisis began.

OIES estimated that if the Strait of Hormuz is ever shut, the world would lose about 86 bcm a year of gas, since some of the exports would be replaced by increased production elsewhere.

Europe is most at risk. It could lose 30 bcm of LNG, says OIES, leading to another sharp jump in prices, to $29 per mmbtu, and higher in central and eastern Europe.

“Clearly, another price shock similar to 2022 could have dire consequences for government budgets in Europe and Asia,” OIES concludes.

Even if the conflict ends, Europe needs to continue to diversify its energy system to avoid such fragility, as my colleagues on Lex conclude. (Malcolm Moore)

Power Points

• The impact on oil of the Israel-Iran conflict could last for years, writes Amrita Sen.

• Claudio Descalzi, chief executive of Italian oil major Eni, says he hates political correctness.

• The price of cobalt jumped after the Democratic Republic of Congo extended an export ban.

Energy Source is written and edited by Jamie Smyth, Martha Muir, Alexandra White, Kristina Shevory, Tom Wilson and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at [email protected] and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.