Impact of geopolitical tensions on oil and gas sector

When JP Morgan Chase CEO Jamie Dimon speaks, the world tends to listen. He warned investors that the world may be grappling with one of the most dangerous periods in decades as we see the Israel-Hamas conflict evolve.

Such geopolitical earthquakes tend to have an impact on key commodities and entice investors to flee to safe havens.

Oil shot up by about 6 percent at the outbreak of the conflict. Brent came down a bit only to jump another 6 percent on Friday. As of Monday-midday CET Brent rose to above $91 per barrel. The price is still below the $94.4 a barrel we saw on Sept. 27. Why did we not see more of a move on the oil price amid the fear of a spreading conflict in the Middle East?

Iran had upped its production to a multiyear high above 3 million barrels per day in the summer. While there is a danger of increased sanctions on Iran, if the conflict spreads and the US sees a direct or indirect involvement of Iran, this may not affect Iranian production disproportionally. Most of the Iranian crude goes east to China where it is refined by small refineries, the so-called “teapots,” which have no interaction with the international financial system and are therefore more or less immune to US sanctions.

On top of that, the US might find it tricky to constrain both Iranian and Russian crude at the same time looking at the demand-supply picture of oil. The International Energy Agency raised its demand forecast for this year in its recent monthly analysis.

This does not mean that we are out of the woods though. Should the war escalate regionally, we need to be aware that around 17 million bpd, or 17 percent of global oil demand pass through the Iran-controlled Strait of Hormuz every day. 

Geopolitical events always impact how companies see investment opportunities in affected regions. The conflict may have an impact on two of the regional cross-border deals in the oil and gas sector. BP and ADNOC plan to buy a 50 percent stake in Israeli gas producer New Med Energy for $2 billion. The hostilities will almost certainly impact the transaction consortium of Total Energies, Eni SpA, and Qatar Energy to drill a gas field off the shores of Lebanon. 

The deal only became feasible after the US had brokered a deal between Israel and Lebanon, which delineated a maritime border between the two countries for the first time ever. This will come as a blow to Lebanon whose cash-strapped economy could really benefit from foreign currency revenue in any form whatsoever.

This brings us to gas which showed just how jittery markets are. After the closure of the Chevron-operated Israeli Tamar field, Egypt’s gas imports from Israel fell by 20 percent overnight, which has an impact on its liquefied natural gas production. Europe’s gas prices reacted immediately, temporarily shooting up by 40 percent in spite of storage facilities being filled above the 90 percent mark. True, the explosion and subsequent closure of the two-way interconnector pipeline between Estonia and Finland and the continuous labor dispute at an LNG production site of Chevron in Australia may also have played a part. However, the immediate reaction came hot on the heels of the closure of the Tamar field. Gas has come down a bit in Europe. The volatility surrounding the developments in the Middle East goes to show, however, just how jittery markets are.

For the time being, markets have calmed somewhat. Looking forward, all will depend on whether or not leaders manage to contain the current hostilities from spreading through the region. 

Keeping a close eye on oil, gas, and traditional safe havens like gold and the Swiss franc is a prerequisite to assess how markets evaluate the current geopolitical problems. At the same time, we should not forget the longer-run impact on other sectors in the region, like for instance, tourism. Many of the Middle Eastern countries bank on tourism for their long-term economic ambitions. This sector employs about 10 percent of the global workforce, which is important for a region with a very young population. In other words, we should expect volatility in the short run and we should not forget to evaluate what these current geopolitical problems could mean for the economic aspirations of the region in the longer run.