The Iran conflict is now escalating.
Brent crude is up nearly 15% as traders worry about supply again. Ships are said to be leaving the Strait of Hormuz, but not entering. A clue that they’re getting out of Dodge.
While crude oil rightly gets the headlines, the liquified natural gas (LNG) market should not be overlooked. It’s already under stress.
The escalation could drive earnings higher for Santos (ASX:STO) and Woodside Energy Group (ASX:WDS).
The wider context provides further insight.
On 29 June, the Financial Times reported that European gas storage levels were at risk of entering the upcoming winter with levels at 15-year lows.
April to October — the warmer months in the Northern Hemisphere — is considered the ‘restocking’ season.
Then came the original Iran escalation back in March.
Qatar supplies 20% of global LNG. Not only did Iran close the Strait of Hormuz and block exports, it also severely damaged Qatari LNG infrastructure.
This is an acute problem for Europe because it also wants to ban Russian LNG.
Back on 29 June, energy analysts were still pencilling the return of Qatari gas thanks to the Iran peace.
That looks like a problem suddenly.
That’s not all.
Europe is also competing with Asia.
The Economist reports this week:
“Buyers in Asia, where a scorching summer is turbocharging demand, are outbidding Europeans for American cargoes at every turn. LNG tankers are being diverted in record numbers.
“Unlike oil prices, which despite an uptick amid the latest hostilities are well below their war-time highs, gas prices remain 48% higher in Europe and 62% higher in Asia than in February.”
The trend can be seen visually below:
The article also adds that China doesn’t have a massive strategic store of gas in the same way it does oil.
That means it could step into the market at any time to secure supply if it has to. That adds in a rogue element that makes it harder for the market to price volumes appropriately.
Of course, there’s no suggestion that Europe will run out of gas. The question relates to how much it will have to pay.
For example, after the initial Russian invasion of Ukraine, European gas prices went as high as €342 ($564) per megawatt hour. That, in turn, drove down consumer spending and the outlook for the economy.
Conceivably, the same could happen again should this latest bout of Middle East disruption go on indefinitely.
LNG is a global market. If Europe and Asia are bidding strongly, the global price rises. That should benefit Woodside and Santos which can sell any spare cargoes into the spot market.
Write to Callum Newman at Mining.com.au
Images: Economist, Unsplash
