Energy prices surge as tanker disruptions, facility shutdowns, rattle global supply

A general view of Isfahan Refinery, one of the largest refineries in Iran and is considered as the first refinery in the country in terms of diversity of petroleum products in Isfahan, Iran on November 08, 2023. The products of this refinery include liquefied gas, gasoline, gas oil, aviation fuel types, kerosene, solvents, crude oil and sulfur. (Photo by Fatemeh Bahrami/Anadolu via Getty Images)

Energy prices rose sharply Monday as disruptions to tanker traffic through the Strait of Hormuz and damage to production facilities raised uncertainty about how U.S. and Israeli attacks on Iran would affect supply to the world economy.

The biggest shock was to natural gas prices, which rose more than 40 per cent in Europe when QatarEnergy, a major supplier, halted production of liquefied natural gas after its facilities were attacked.

“Infrastructure is at risk throughout the region, and it’s not just at risk because of deliberate attacks, but also inadvertent attacks,” said Kevin Book, managing director at Clearview Energy Partners. “Shrapnel and debris from missile interceptions can fall onto facilities and disable them too, and so there are a number of challenges that come from this kind of conflict in an area with so much energy production.”

U.S. oil rose 6.3 per cent to US$71.23 per barrel, while international standard Brent was up 6.7 per cent to settle at US$77.74 per barrel.

Higher oil prices raise the prospect of costlier gasoline for U.S. drivers as well as increased prices for other goods at a time when people in many countries have been stung by inflation.

A key focus was the Strait of Hormuz at the southern end of the Persian Gulf, through which 20 per cent of the world’s oil supply passes. Tanker traffic dropped sharply as satellite navigation systems were disrupted, data and analytics firm Kpler said on X. The U.K. Maritime Trade Operations Center reported attacks on several vessels in the area on either side of the strait and warned of elevated electronic interference to systems that show where ships are.

A bomb-carrying drone boat struck a Marshall Islands-flagged oil tanker in the Gulf of Oman, killing one mariner, Oman said.

Iran has been threatening vessels approaching the Strait of Hormuz and is believed to have launched multiple attacks.

That’s resulting in a “de facto closure” of the strait, defined by the risk tolerance of ship operators and sea captains, with traffic slowing to a trickle, Book said. “The reality though is the insurance companies are raising prices or, in some cases, canceling policies and sea captains have risk concerns. So too do ship owners and shippers,” he added.

Saudi Arabia intercepted Iranian drones that attacked the Ras Tanura oil refinery near Dammam and the refinery was shut down as a precaution, Saudi state television reported. Market attention has focused on whether the conflict will widen to other oil-producing countries in the region.

Oil price shock comes as US gas prices were already rising

The price of crude is the single largest factor in how much U.S. drivers pay for fuel — a highly political issue ahead of midterm Congressional elections. And higher oil prices are usually felt at the pump within a couple of weeks at most.

Gas prices are already rising ahead of the summer driving season as people travel more. The national average for a gallon (3.7 liters) of regular went up by 6 cents Monday to US$2.99, according to motoring club AAA.

Crude price increases are substantially reflected in pump prices in 20 days and a US$10 per barrel increase typically results in around a 25 cent rise per gallon, according to 2019 research by the Federal Reserve Bank of Dallas.

The price of crude has less impact in Europe, where taxes make up most of the price of fuel, but higher energy costs can affect prices across the economy. A sustained rise of US$15 per barrel could add 0.5 percentage points to consumer prices in Europe, according to Holger Schmieding, chief economist at Berenberg bank.

No way around the Strait of Hormuz for much of the oil

There are pipelines that circumvent the strait, but they don’t have enough capacity to move all the oil that passes through the waterway. Saudi Arabia, Iraq and the United Arab Emirates all depend on tankers to get the bulk of their oil to global markets.

Analysts say completely blocking the strait would hurt Iran too since all of its 1.6 million barrels per day pass through the strait. Most of that goes to China, where refineries are less concerned about U.S. sanctions that prevent Iran from selling its oil elsewhere.

“Iran has essentially two ways to close the strait. One is to harass or attack ships, and the other is to lay down mines,” Book said. ”And without a Navy, both of those things would be difficult. So, if the president succeeds in ‘annihilating,’ in his words, the Iranian Navy, then long-term prospects of closure should decline, and that should increase the likelihood that ships will start sailing again.”

The strait is also a key route for liquefied natural gas. European futures contracts for April delivery shot up to 45.46 euros (US$53.26) on the ICE commodities exchange after QatarEnergy said it would stop its production of liquefied natural gas. The state-owned firm blamed the war for the decision.

Qatar is a major gas supplier for Europe, which relies on shipments of liquefied gas, or LNG, to replace supplies of Russian pipeline gas lost due to the invasion of Ukraine.

Long-term disruption could send prices higher

Monday’s price increase was within the US$5-US$10 per barrel range expected by analysts based simply on the fear factor associated with the outbreak of war. And some war concerns were already reflected in the price before the conflict started.

However, long-term disruption to ship traffic in the Strait of Hormuz could send prices even higher, and so could damage to oil infrastructure in other Gulf countries. Meanwhile, a shorter conflict in which disruptions are easily reversible could mean the current price spike won’t last.

On Monday, U.S. President Donald Trump said that the U.S. expected its military operations against Iran to last four to five weeks but has “ the capability to go far longer.”

“The key question for the global economy is obvious: Will the Strait of Hormuz be effectively closed for oil and gas exports for more than a few weeks?” Schmieding said. “If so, it would hurt global growth and raise global inflation noticeably. But I would expect Trump to go to great lengths to prevent a lasting surge in energy prices that could hurt him at home ahead of the U.S. midterm elections in November.”

He forecast oil prices would return to US$65-US$70 per barrel after a near-term spike.

Uncertainty and volatility are likely to continue

Iran’s attack on the Ras Tanura refinery represents a major escalation, a Middle East analyst said, with Iran demonstrating that key Gulf energy infrastructure is within its reach, and investor sentiment likely to worsen.

Torbjorn Soltvedt, principal Middle East analyst at risk intelligence company Verisk Maplecroft, said Iran’s goal is to raise the economic costs of the conflict for Gulf states like Saudi Arabia and the United Arab Emirates, hoping that these countries will pressure the U.S. and Israel to de‑escalate.

He said that the coming days and weeks will be marked by uncertainty and volatility in global markets, with oil prices likely to push past US$80 per barrel.

“If we start to see additional direct attacks against energy infrastructure, not just in Saudi Arabia and Kuwait, but in other countries in the region, then that’s when the market will start to think about a push toward US$90 and perhaps even beyond.”

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David Mchugh And Cathy Bussewitz, The Associated Press.

Associated Press writers Suzan Fraser in Ankara, Turkey, and Jon Gambrell in Dubai, United Arab Emirates, contributed to this report. Bussewitz reported from New York.