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Middle East risk to energy may trump 1970s oil shock – analyst

(Montel) Energy market participants are experiencing “geopolitical risk fatigue” but a potential closure of the Strait of Hormuz could see an impact three-fold the size of the 1970s oil price shocks, said Saul Kavonic of MST Financial.

“It's clear that experts on the military situation, in the intelligence community and in politics in the Middle East are far more concerned about a conflagration of the conflict – to essentially more directly draw in Iran and engulf the Strait of Hormuz – than markets are,” Kavonic told Montel’s Weekly Podcast.

Much of this was due to “geopolitical risk fatigue setting in”, he said, noting “after last year, there were so many headlines [and] so much theoretical risk about supply disruptions coming from Russia in the wake of the Ukraine war, which then didn’t materialise”.

As such, markets were delaying any notable price reaction until supply was actually disrupted, or at least until there was a “very imminent” risk of supply being affected, he said.

“The problem with that is that it’s going to leave the market all the worse prepared if a supply disruption does actually eventuate.”

Hormuz concerns
Kavonic said the Red Sea risk – where Iran-backed Houthi rebels have been attacking shipping since November – was “underappreciated” but that with vessels able to take alternative routes, it was “ultimately just a logistical inefficiency”.

“But if this conflict moves to the Strait of Hormuz, it’s completely different,” he said, regarding the only sea passage from the Persian Gulf to the open ocean.

“There is not going to be any other market route for most of those volumes and we’re talking about 20% of global oil supply and 20% of LNG supply,” he said.

“If that is disrupted, it is going to be up to three times the size of the market shocks we saw in the 1970s from conflict in the Middle East,” he added.

An oil embargo imposed by members of the Organisation of Arab Petroleum Exporting Countries (OAPEC) in 1973 led to fuel shortages and sky-high prices throughout much of the decade.

“That saw about 8% of global oil supply disrupted but LNG was still in its infancy then, so that wasn’t really disrupted at all,” Kavonic said.

“But now we’re talking about something that could be three times that size and what would make it worse is that gas and oil will be disrupted at the same time.”

In a worst-case scenario, oil prices could jump to USD 200/bbl, while LNG could reach between USD 50-100/MMBtu, he said.

This compares with a current front-month Brent crude oil price of less than USD 100/bbl and a JKM LNG marker price of around USD 9.50/MMBtu.

“I think that is still a possibility rather than a probability but this is a possibility that has been growing in likelihood every single day since 7 October,” he said, regarding the date that Hamas militants first launched attacks in Israel.