Get Ready for Another Fiasco in Middle East

Despite the arrival of winter, crude oil and LNG prices remain below the expectations of energy sector analysts. The global energy market appears to be heading towards an oversupply situation, with higher availability of crude coinciding with relatively weaker consumption. A potential oil glut could keep prices under pressure for an extended period. This is hardly good news for some influential stakeholders in the global energy and financial markets.

The Oil Big are certainly unhappy with the persistent and significant decline in crude oil prices. Lower prices translate into reduced revenues and profitability, particularly for producers with higher extraction costs. Fund managers are also finding fewer opportunities to generate attractive returns as subdued prices and declining volatility limit trading opportunities.

Meanwhile, media houses continue publishing reports highlighting declining revenues and earnings of major oil companies. The narrative of shrinking profitability is becoming increasingly difficult for the energy industry to ignore.

Here comes my apprehension; will the world be allowed to enjoy relatively cheaper energy, or should we get ready for another fiasco in the Middle East?

I suspect that a series of incidents could emerge to disrupt supplies, revive market volatility and push crude prices upwards. These could take several forms:

1-      Escalation of the ongoing Middle East conflict, creating fresh uncertainty over regional oil and gas supplies,

2-      Attacks on oil-carrying vessels navigating the Strait of Hormuz and the Red Sea, raising shipping costs, insurance premiums and supply concerns,

3-      Disruption of Russian crude oil and diesel movements, tightening global availability,

4-      Attacks on vessels passing through the strategically important Strait of Malacca, threatening another vital energy trade route.

These are possibilities, not predictions. However, the strategic importance of these routes makes even isolated incidents capable of triggering disproportionate reactions in international energy markets.

The common denominator is simple; supply disruptions would restore the geopolitical risk premium that has been missing from crude oil prices. Higher prices and increased volatility could once again improve the earnings prospects of energy majors and create fresh opportunities for fund managers.

The world must remain alert to the possibility that commercial interests and geopolitical tensions could converge.

When cheaper energy becomes a problem for powerful stakeholders, the possibility of another manufactured crisis deserves serious consideration.