‘Fool’s solution’: Trump could make the energy disaster worse if he plays his last card |
‘Fool’s solution’: Trump could make the energy disaster worse if he plays his last card
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It is hard to decide which is the bigger disaster: the unfolding car crash in the global gas market or the mounting danger that entire countries will run out of oil.
The benchmark TTF contract for gas in Europe was €29 ($47) per megawatt hour (MWh) in mid-February. Bank of America says it could reach €500 later this year if the Strait of Hormuz remains closed for 10 weeks, as it may well do.
That would blow through the record high seen after Russia’s invasion of Ukraine and amount to a full-blown economic emergency for Europe, Britain, Japan, South Korea and South Asia.
The picture is dramatically worse after Israel attacked Iran’s South Pars gas field, adding upstream gas and oil infrastructure to the menu of targets on both sides of the Gulf.
Iran’s missile retaliation on Qatar’s Ras Laffan has inflicted serious damage to the giant complex, which alone produces a fifth of the world’s liquefied natural gas (LNG).
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It will be months before shipments start again. Qatar Energy says 17 per cent of production is lost for three to five years. It will have to declare force majeure on LNG supplies to Italy, Korea, China and Belgium.
It is just as bad for oil. The paper market that we all follow does not capture the drama. Physical deliveries are under far greater stress than Brent futures (at about $US110) would suggest.
Actual barrels of the Dubai basket and Oman’s Murban are fetching close to $US170 ($240) a barrel as Asian refiners scramble to buy anything they can. Jet fuel deliveries have hit $US210 in Rotterdam and $US240 in Singapore.
Kurt Barrow, vice-president of oil at S&P Global Energy, says it may become physically impossible to obtain supplies. “If the strait stays closed for two months, you’ll have plants without feedstock and we’ll get real rationing. We’ll have panic buying and hoarding,” he said.
“This is the largest supply disruption ever. Net, we’re around 15 million barrels a day (b/d) short in the market. Crude gets the headline, but the actual impact is further downstream in refined products, diesel, jet, fuel or naphtha. There are 68 refineries in the war zone.”
Some 10.5 million b/d of production has been closed because countries have run out of storage or face drone attacks on offshore rigs. Every week that the war goes on inflicts further permanent damage on the oil wells.
“These are massive complexes being shut down in the Gulf and it’s going to take a long time to bring them back online. Frankly, Donald Trump declaring victory doesn’t change that,” Barrow said.
Jeff Currie, an oil veteran at the Carlyle Group, says the Russia shock in 2022 was a picnic compared with what is happening now. The world will hit a brick wall within two months. “We may need to ground planes, shut chemical plants and accept lower crop yields,” he said.
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“Hydrocarbons are woven so deeply into the economy that pulling one thread unravels dozens of others. Oil and gas are not just energy – they are the molecular storage that balances grids, the jet fuel that moves cargo, the nitrogen that grows food, the naphtha that becomes plastics.
“Markets have been trained to ignore geopolitical shocks – buy the dip, fade the rally – because cool heads will prevail. On rare occasions, however, coolness turns out to have been complacency.”
Currie compares today’s nonchalance to the misjudgment in January 2020 as Westerners watched the COVID lockdown in China and carried on as if the virus had nothing to do with them.
Natasha Kaneva, commodities chief at JPMorgan, said Asia may be the epicentre of the shock now but this is a time-lag effect. Europe will face its own physical shortage as we go into April.
The average tanker trip from the Gulf to Asia is 10 to 15 days. It is 25 to 30 days to Europe via Suez, and 35 to 45 days via the Cape. Europe is still receiving normal prewar cargoes. West Asia is not. That is where violent “demand destruction” has begun.
I hate to bring bad news, but markets are already starting to price in the next body blow to the world energy system: a full or partial ban on crude oil exports from the combined bloc of America and Venezuela.
The spread between global Brent and Texas crude (WTI) has ballooned to more than $US16 a barrel. Traders are picking up ever louder talk from “America First” circles of plans to try to hold down prices within the US fortress economy by starving the rest of us.
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It would deprive the global market of up to seven to eight million barrels a day of oil and petroleum products, depending on how much Trump would allow out to help his culture war friends.
Clearly, he is receiving some abominable advice. “If the war were to be extended, it wouldn’t really disrupt the US economy at all,” said a breezy Kevin Hassett, head of the National Economic Council at the White House.
A second shoe could drop at any moment. We have not heard from the pro-Iranian Houthis in Yemen. They have the means to harass Suez-bound tanker traffic and to attack Saudi Arabia’s Red Sea port of Yanbu, an outlet for some 3.5 million b/d of Saudi oil from the East-West pipeline.
“We continue to watch for any signs that the Houthis may enter the conflict and imperil the Red Sea,” said Helima Croft, a former CIA analyst now at RBC Capital.
“Even just a few missiles or drones fired into the Bab-el-Mandeb Strait would push oil prices several legs higher,” she said.
America is largely insulated from the natural gas crisis but not from the surging price of oil. Petrol at the pump is already more than $US4 a gallon in several states.
As pressure mounts, there must be a high risk that Trump will play his last card, and he might relish an oil export ban to punish the world for refusing to join his war.
We should all have learnt by now that Trump is not moved by rational calculation.
He could force Venezuela to sell all its heavy crude to the US to balance Texas light sweet in its refineries, and might threaten Canada until it agrees to sell its heavy varieties at the same capped price.
This would buy him a little time, but it would ultimately be a fool’s solution. “Refined products like diesel, jet fuel and gasoline are priced on the global market,” said David Fyfe, chief economist at energy specialists Argus.
“The US would still have to import some medium sour crude from the Mid-East and Latin America. It risks backfiring badly,” he said.
Such a ban would throw the world economy into violent convulsions, inviting gale force blow-back into the US itself. But we should all have learnt by now that Trump is not moved by rational calculation. He needs the constant nourishment of escalation dominance, and right now, the Iranians have snatched it from him.
The optimistic view is that Trump will chicken out (TACO), as he always does when the market speaks, and leave the Gulf to put out the roaring fire that he has so flippantly ignited.
“Eventually, the price reaction will be so acute that Trump will be forced to TACO. No amount of jawboning is going to save the day,” said Rory Johnston, founder of Commodity Context.
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Well, perhaps, if the Iranians allow him such an easy way out. They may instead keep the Strait closed in a prolonged guerilla war of attrition, until he agrees to a deal on Tehran’s terms.
As they say, it takes two to TACO.
The Telegraph, London
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