Since the attacks by the US and Israel on Iran began, the oil price has risen by up to 60 percent in a few days. How structural is that increase and can we expect a further surge? We call Peter Verbaken, Head of Liquid Commodities at APG, about it.
'The worst-case scenario for the oil market'. This is how Verbaken qualifies the recent developments in the Middle East, referring in particular to the closure of the Strait of Hormuz by Iran. About a fifth of global oil and LNG (liquefied natural gas) shipments normally pass through this strait.
Unprecedented
Verbaken: "The crucial question now is how long this will take. If that is still one or two weeks, it obviously has less impact than if it takes another four to six weeks or more. There is a lot of uncertainty about this and that is also clearly visible in the market. Last Monday, the oil price went from below 90 dollars to almost 120 dollars within 24 hours, then back to 100 and finally, after settlement (the official closing price, ed.), went back to 90. That is really unprecedented."
Everyone is aware of the seriousness of the situation, says Verbaken. "The closure of the Strait of Hormuz has a huge impact on the supply of oil. But many investors seem to assume that Trump will change course if the effect on the price becomes too great. Last Monday he indicated that he expected the conflict to last not that long and that has also brought the oil price down considerably. Anyway, Brent oil is now around 90 dollars per barrel and that is of course still considerably higher than the approximately 70 dollars before the closure of the Strait of Hormuz."
Back to 2021?
Is there a risk that the Netherlands will go back to a situation like in 2021-2022, when energy prices went through the roof? Verbaken: "For the Netherlands, the gas price is also really crucial. Four years ago, the supply of Russian gas fell away and that impact was greater than it is now. In the situation we are dealing with now, 20 percent of the LNG supply comes from Qatar, so that must pass through the Strait of Hormuz. Most of that LNG goes to Asia, but a part of it also goes to Europe. Qatar has now completely shut down its production, so that impact is being felt. The fact that we now have the winter behind us dampens that effect a bit. But here too, if this situation comes to an end within one or two weeks, it will not be that bad. But if it takes another six weeks or more, the European gas price will probably be significantly higher again than it is now."
Claiming victory
The question of how structural and long-term the rise in the oil price (and gas price) is, according to Verbaken, is therefore very difficult to answer. "No one can look into Trump's head. But even if he claims victory over Iran in the short term and accepts the son of the former supreme leader as leader, there is still the question: what is Iran doing? Will they agree to a ceasefire, after all the damage that has been done in the country?"
The uncertainty about Iran's eventual stance makes this a different situation than when Trump threatens with trade tariffs, Verbaken explains. "If Trump changes course with trade tariffs, you can reasonably estimate the effect of that. If you are at war with another party, it is a lot more difficult. You can lay down your arms yourself, but in this case, you just must hope that Iran's threat to shipping in the Strait of Hormuz will also disappear. In addition, Trump must also be able to sell an end to the conflict with Iran to his supporters."
Temporary band-aid
If the current situation continues, the conditions for the oil supply will become more precarious by the day, according to Verbaken. "If this lasts another two weeks, you will lose so much supply that the oil price will really rise again, that’s almost inevitable. The effect of this conflict on the oil market cannot be overestimated. In my view, the impact on the price really should be even greater. The fact that this is not the case has to do with the fact that investors have become accustomed to Trump backtracking if the impact becomes too great."
The release of the strategic oil reserves by the International Energy Agency (IEA) to dampen the oil price certainly has an effect, says Verbaken. "But if that doesn't go hand in hand with a credible route to reopen the Strait of Hormuz, it will only be a temporary band-aid on the wound and won't have much impact for long."