Iran war fuels fears of European energy inflation shock
The energy price shock that followed Russia’s invasion of Ukraine four years ago is fresh in the minds of European policymakers as the conflict in Iran once again drives oil and gas prices higher. Experts, however, think this time could be different.
Fears of a full-blown energy crisis on that scale — which saw oil top more than $120 a barrel by June 2022, gas prices soar, household energy bills rise, and eurozone inflation hit a record 9% — may yet be overblown, according to investment strategists.
Brent crude, the global oil benchmark, has retreated from the near-$120 per barrel seen earlier in the week, as the International Energy Agency agreed on Wednesday to release a record 400 million barrels of oil from its emergency reserves. European natural gas prices, as measured by the Dutch TTF futures benchmark, also pulled back from a three-year high of 63.77 euros per megawatt-hour and were last seen under 50 euros per MWh on Wednesday.
‘Eerily familiar’
James Smith, developed markets economist focusing on the U.K. at ING, said that while the initial energy price reaction appears “eerily familiar” to the start of the Ukraine invasion, the global economic picture looks very different from the 2022 shock.
“The 2022 energy crisis landed on a global economy that was ripe for inflation to take off. Supply chains were fractured, job markets tight, and fiscal policy was fueling the fire. All of that, to varying degrees, is less true today,” Smith said in a note.
Brent crude.
The impact on Europe’s inflation trajectory hinges on the duration of the conflict, analysts say.
The ongoing shutdown of Qatari production of liquefied natural gas (LNG) — which accounts for almost a fifth of global LNG supply — and attacks on vessels in and near the critical Strait of Hormuz could disrupt oil and gas stocks in Europe for longer.
Qatar has emerged as a key source of LNG supply to Europe, which has cut its dependence on Russian pipeline supply since the invasion of Ukraine.
Michael Lewis, CEO of German multinational energy supplier Uniper, said the company has “weaned itself off” Russian gas since the Ukraine invasion, diversifying its sources across LNG and pipelines from Norway, the U.S., Canada, Australia and Azerbaijan.
“We didn’t want to repeat the challenges of the past which was being reliant on one single source, namely Gazprom,” Lewis told CNBC’s “Squawk Box Europe” on Wednesday.
But he conceded that Europe does not produce the volume of gas it needs to meet its energy needs.
“What we need to do is have more long-term contracts. Following the elimination of Russian gas from our portfolio, we have to buy more gas on the spot market…That’s why we’re rebuilding the portfolio to get more long-term gas contracts into the portfolio which insulates us from some of these price changes.”
Inflation concerns
Smith said that a scenario in which energy supply normalizes after four weeks, bringing energy prices down in the second…
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