Special episode : "Middle East Tensions: What’s at Stake for Energy Markets"

Welcome to the EnergyScan podcast, your trusted source for clear insights on global energy markets. From gas and power to oil and macroeconomic trends, we break down what's moving the markets and why it matters. Let's dive in. I am Julien Warraud, leading the economic research team at Engie Supply and Energy Management.

In this episode, I will be joined by Olivier Gassnier, senior macroeconomist in the Economic Research Team. Hello Olivier. Hello Julien. So, on the 28th of February, Israel and the United States launched airstrikes against strategic targets in Iran, killing many of its top leaders within a matter of hours, mainly targeting the country's military forces and anything potentially linked to its nuclear program, which had already been attacked in June 2025.

So nearly two months later, the conflict has spread across the entire region and has completely disrupted the energy markets, with consequences felt on a global scale. Although there is considerable uncertainty regarding how events will unfold, in this podcast, we aim to take stock of this war and draw lessons for the future. So Olivier, let's quickly go over the sequence of events. How did we end up in this current situation, this fragile ceasefire that solves nothing for the Indian markets?

As you say, Julien, the US and Israel attacked Iran, mainly to put an end to the Iranian nuclear program, which was, however, supposed to have been whipped out by June 2035. But the first problem was that the objectives weren't clearly defined on the Israeli side. The stated aim was clearly a regime change to remove this permanent threat to the Jewish state, but also the eradication of the nuclear program and the massive destruction of Iran's military capabilities. On the US side, however, things were far less clear and it soon became apparent that some of these objectives would not be achieved without a ground intervention that would be highly unpopular with Donald Trump's electorate.

It's also highly likely that in the wake of the operation in Venezuela, Iran's capacity for resistance was underestimated. And its capacity to cause disruption as well. Knowing it was militarily inferior but having long been prepared for this scenario, Iran quickly targeted its neighbors, the Gulf states, and particularly their energy infrastructure - production sites, pipelines, refineries, ports, power stations. Why?

So that they would put pressure on the US to halt its attacks. And Iran did not stop there as it very quickly blocked the Strait of Hormuz through which 20% of global oil demand passed, roughly 20 million barrels per day, as well as considerable volumes of LNG, mainly from Qatar, along with fertilizers, chemicals, and materials. And so suddenly the traffic through a strait plummeted by 90%. Simply by making threats and firing a few whirling shots, Iran had just blocked a significant portion of global trade.

The war had barely begun on the most feared scenario materialist. Airstrikes then multiplied. Donald Trump claimed victory several times, while Israel took the opportunity to open a new front against Hezbollah, Iran's traditionally ally in Lebanon. But Iran continued to resist and strike at countries in the region normally under US protection.

And on the 7th of April, a two-week ceasefire was declared under the auspices of Pakistan, which acted as an intermediary. Talks involving notably the US Vice President Vance followed in Islamabad but came to nothing, which led the US in turn to impose a blockade on Iranian ports. In other words, today the Iranians only allow ships bound for or leaving their country to pass, while the US intercepts them but allows others to pass. As a result, even though the ceasefire has been extended, traffic remains very, very low in the Strait of Hormuz.

Absolutely. As we've said, a great deal of raw materials, goods, and processed products used to pass straight or foremost. But this is above all an oil crisis, and it's reflected in the prices. Three times in the start of the war, the price of Brent has approached $120 per barrel and remains above $100 per barrel today.

Even though a significant proportion of market participants seem to be anticipating a swift unfavorable outcome. Yeah, one need only look at the US equity markets, which are breaking record after record. Exactly. Moreover we talking here about Brent Futures contracts the first of which expires in June and soon to be July In the physical market prices have risen much higher to over per ball And prices for petroleum products are soaring.

Diesel in Asia, as refineries were sometimes importing nearly 100% of their crude from Gulf countries or Iran. and jet kerosene and gas amine in Europe, which were even reliant on refineries west of the Strait of Hormuz. Stocks are falling rapidly now, and measures to restrict demand are beginning to be taken. This happened very quickly in many emerging economies in Southeast Asia and is now starting in Europe.

The International Energy Agency estimates that Europe would need to replace at least 90% of its kerosene imports from the Middle East to get through the summer season without difficulty. At a 50% replacement rate, stocks would be too low as early as June. So yeah, the fall in oil demand is already very significant, particularly in Asia. But the loss of production is colossal.

Yes, it was around 8 million barrels per day in March. and now it's estimated around $12 to $13 million per day. Storage capacity in the Gulf states was quickly exhausted as they could no longer export. Then there was the additional impact of the Iranian attacks on energy infrastructure.

62 oil and gas facilities were hit in the region, including $2.7 million per day of oil production capacity on over 2.3 million barrels per day of refining capacity. Okay, but Saudi Arabia isn't doing too badly, thanks to the pipeline that crosses the country from east to west and leads to the Red Sea.

That's true. It allows the country to transport nearly 7 million barrels per day of food, 5 million for exports and 2 million for domestic refineries. But this is clearly an exception. Only the United Arab Emirates uses another pipeline that bypasses the straighter formals, though with a much lower capacity, and Iraq, which exports a maximum of 300,000 per day to the Turkish port of Cien.

But by March, Iraqi production, for example, had fallen by more than 60%. Okay, so to rebalance the markets, other means have been found so far. But these are not sustainable and make a swift resolution to this crisis all the more essential. Each country has indeed strategic reserves specifically to deal with this kind of event.

And they are the auspices of the International Energy Agency. 400 million barrels of oil have been released onto the market since mid-March. We do not know the precise schedule, but we know that this amounts to 172 million barrels over three months for the US. So if we assume that every country is doing roughly the same, this will amount to between 4 and 4.

5 million barrels per day until mid-June, which is really far from negligible, but only makes up for half of the lost production. It's, however, an operation that could be repeated once, but after that, stocks would be too low. But there were also offshore stocks belonging to countries under sanctions, namely Russia and Iran. Yes, it's indeed paradoxical.

One of the Trump administration's first decision was to lift sanctions against those countries, buying all from these two nations, Russia and Iran. And India benefited greatly from this, but stocks since then have been largely depleted. We also know that China, which had built up huge stocks last year, has drawn heavily on them since the beginning of the crisis. But again, this cannot last forever.

Ultimately, the final balancing factor is demand. And this is when the crisis becomes very real for everyone. First, you have soaring energy prices, and then shortages and restrictions. So, this leads us to discuss the economic consequences of the crisis, but we haven't mentioned yet the gas and electricity markets.

Yes, turning on to gas and energy, the dynamics are a bit different, but potentially just as serious. At first, gas prices didn't explode like oil prices did, but that doesn't mean that the gas market was safe. It's because the supply shock is less acute? Exactly.

Qatar represented 19% of total energy exports last year, but only 3% of total natural gas supply. And this shock comes at a time of a major increase in liquefaction capacities by the end of the decade mainly driven by the US But in the short term each month without LNG cargo transiting the straits results in around 10 BCM of LNG supply loss. So which countries are the most impacted by the closure of the straits of Ormans? So first, Asian buyers, China, Pakistan, India, Japan, Korea, they suddenly had to either reduce or even stop briefly their energy imports or compete more aggressively for alternative cargos.

That competition inevitably spilled over into Europe. So even if Europe's direct dependence on Qatar eLNG is limited, Europe still feels the price pressure. Yeah, that's one of the key messages. Energy markets are global.

even when physical dependencies look manageable on paper, as Qatari energy supply represents only 7% of all energy imports into Europe last year. And substitution options are constrained. Yeah, very much so. Coal can replace some gas in power generation, but not everywhere and not without political and environmental limits.

Industry has even fewer alternatives in this case, as the oil product shortage, as you mentioned, is more acute than gas. And it should be noted that European gas demand remains quite weak compared to its 2021 level before the Ukraine war, still 15 to 20% down. And one difference between crude oil and natural gas in this crisis is that there's generally no strategic reserves for natural gas. Absolutely, and this crisis takes place at the beginning of the storage injection season in Europe, where stock levels are in the lower part of their historical range.

This is the main supportive factor for open gas prices in the current context, and the unusual backwardation displayed in the TTF forward curve between summer 26 and winter 26 prices. Note that the EU Commission already revised lower its storage feeding targets to 80% for the next winter season, and is even thinking about lowering it further to 75%. What about the long-term consequences of the damages inflicted on Qatar's Raslafan plant? yeah so Qatar Energy already mentioned that two liquefaction trains representing 17 percent of their existing capacity will be offline for three to five years so these 12.

8 million tons of energy capacity and volumes were delivered to China, South Korea, Italy and Belgium meaning the impact is not limited to Asian customers in that case but note also that the startup of the liquefaction expansion project from the Northfield East facility with a 32 million tonne per year capacity has also been postponed to the end of 2026 and could be delayed even more depending on the outcome of the current ceasefire period. So overall, the International Energy Agency estimates that damage caused by the attacks on Qatar's energy facilities could reduce the countries' energy output by nearly 70 BCM by 2030, while delays to the Northfield East expansion project could also reduce energy supply by nearly 27 BCM, 20 BCM over the 2026-2030 period.

So now moving on to European power prices, I have the impression that the impact of the crisis has been rather uneven, has it? Absolutely. The impact of this crisis on the European power market depends on each country generation mix. And unsurprisingly, countries with a large low carbon share, including nuclear, wind, solar and hydro, like France or Spain, have seen a rather muted price impact so far.

Most of the upside has been located in Italian, German, Dutch or Polish prices, as natural gas and coal still play a significant role in their power mix. Moves in EUA prices also had an impact. It seems that the EUA market has been rather resilient since early March. Yes, actually, EUA prices have dropped significantly in February, below the start of this Middle East crisis, on the back of rising criticism from top European leaders on the ETS.

This was the central topic of our last podcast, by the way. While we could have anticipated a further decrease in EUA prices with the ongoing crisis, it was clearly not the case as the EU Commission responded quickly to calls to reform the ETS and decided to modify its market stability reserve mechanism relatively at the margin without reviewing the key futures of the ETS. This has reassured market players regarding policy risk in the short term but we need to monitor closely what will be the outcome of the ETS1 review expected in Q3 this year So now let return to the consequences of this crisis As we have already said the financial markets seem fairly confident that an agreement will be reached quickly and that everything will return to normal.

It's true that the economic consequences of the crisis are mainly visible in certain Asian countries at the moment. Yes, the OECD and the IMF have already proposed an initial revision of their forecast, but Unsurprisingly, I would say, downwards for global growth. For example, from 3.4% to 3.

1% for global GP growth for the IMF. So it's rather limited. And upward for inflation. So we are only talking so far about a few tenths of percentage points.

And when we look at leading indicators and surveys of consumers and businesses, it's in Europe that we see the clearest impact. On peer-ups, that reflects the fact that fiscal room for maneuver there has become non-existent, and that the ECB has made clear that from the outset its intention not to be overwhelmed by inflation as in 2022. So the market now expects central banks, and especially the ECB, to rise interest rates this year, but this is far from guaranteed if growth plummets.

We must nevertheless remain cautious if the crisis were to drag on, future shortages were to occur and inflation were to soar. It is already accelerating. There would likely be severe adjustments in the financial markets. The productivity gains expected from AI are not a cure-all for economic years.

Moreover, is it a good thing that the U.S. equity markets in particular are so optimistic? We have seen since last year that Donald Trump was very sensitive to their movements and that this was often what held him back, whether on tariffs or Greenland, for example.

Now the markets no longer re-exerps that restraining force. There is also a significant geopolitical dimension to this crisis. What will China, Iran's ally, do? Will European countries not be forced to review their stance towards Russia on oil imports?

Or will the issue of the Strait of Hormuz be resolved, given that the Iranians are now firmly resolved to capitalize on this strategic position, that is to say to take their share of the trade passing through this waterway? Would this be acceptable to the Gulf states? What will become of their economic model if the Iranian regime and the threat it poses persists? Can Israel accept this regime remaining in power?

So resolving these issues will be far from straightforward. That is in fact why right up until the last moment, no one really wanted to contemplate this conflict. Yeah, so we are coming to the end of this podcast. And we have really to admit that we have very little visibility in the short term.

Logic would suggest that Trump would seek to cut the conflict short to halt the surge, in particular in energy prices, that is also hitting the US, which is politically disastrous just a few months before the mid-term elections. A deployment of US ground troops in Iran would also seem extremely risky, so it must be noted that they continue to build up in the region. Yes, and when one considers the terms of a potential agreement, there are so many sensitive issues on which there is profound disagreement, Iran's nuclear program, the Strait of Hormuz, and Lebanon's relations with Israel, that the risk of a resumption of hostilities appear high.

In that case, we must be cautious as the impact on energy infrastructure could be far worse if the conflict spreads to the Red Sea via the Yemeni-Oti rebels and a threat that must not be overlooked. This would be disastrous for global trade. Yeah, and it's also important to bear in mind that even in the event of a SWIFT agreement, this will not mean an immediate return to normality. The resumption of traffic through a strait will be very gradual.

It will then take several weeks for ships to reach their destinations. The resumption of oil production will be also gradual. And the EIA estimates, for example, that while 80% of Gulf countries' production could be restored by the end of June, the remaining 20% could take two years at least to recover. Energy aspects, a firm that is specializing in the oil market, also estimates that a return to normal for oil products could take until 2030.

Yeah, that is indeed a long way off. And in the meantime, we will have plenty of reasons to accelerate this energy transition. Thanks for listening to our Energy Scan podcast. If you enjoyed this episode, don't forget to subscribe and stay tuned for more insights on global energy markets.