The Forever War? A War in the Gulf That Just Got Worse - Again

Key Market Drivers & Fundamentals

The Forever War? A War in the Gulf That Just Got Worse - Again

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Why should a conflict in the Gulf affect UK business energy costs?

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IT JUST GOT WORSE, NOT BETTER.

As of the beginning of September, the US struck Iranian targets near the Strait after two oil tankers were attacked and Iran tried to lay fresh mines in the water. Iran is now promising a “crushing” retaliation, and the US has warned of an even bigger response if that happens. Oil prices jumped straight away, Brent crude the main global benchmark, traded up to around $95.6 a barrel, its highest point since late July.

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Then the Houthis became engaged in the conflict, by seizing the Red Sea port of Mokha as well targeting Saudia Arabia’s pipelines with drone and missile attacks. Is this now a “forever war” where neither side in their stubbornness is willing to backdown or concede defeat or concessions?

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WHAT THIS MEANS IN PRACTICE

Qatar, one of the world's biggest gas exporters, has had to cancel a big chunk of its shipments to Europe and Asia, this is likely to continue into October and November.

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The UK doesn't buy much gas directly from Qatar, but that doesn't matter much: every cargo the world can't get from Qatar has to come from somewhere else, and that scramble pushes up the price everyone pays, us included.

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IS THERE AN EXIT STRATEGY?

It would seem that Iran are holding all the cards at present, crucially, the Strait of Hormuz, which was open and freely moving pre-conflict.

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Trump can’t be seen to succumb, as he won’t want to lose face. Top aides to President Trump are pushing to keep the Iran war from escalating before 3 November's midterm elections. Will this have any effect?

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SO WILL IT GET BETTER OR WORSE?

Genuinely, nobody knows – and we'd be cautious of anyone who tells you they do. There have already been two attempts at a ceasefire this year (in April and June) and both fell apart within weeks over fairly small triggers. Over the weekend of 19-20th September, the U.S. said that it would talk with Iran at the UN during the week. This led to prices dropping at the start of that week, with President Trump giving his address on Tuesday, that didn’t provide any certainty or clarification around talks, but left all options on the table. Prices then stabilised the following day.

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Given that pattern, and the recent escalation, the safest planning assumption for this quarter is that things stay unsettled rather than calm down quickly. For trading and new contracts, we will have to look at the “small wins” as and when prices dip.