The Iran-Israel war may have thawed for now, but the region remains in a fragile equilibrium, with lingering risks for energy markets, write Nader Itayim and Antonio Peciccia
A ceasefire struck between Iran and Israel this week should help dial down Mideast Gulf tensions that, for a moment in time, looked likely to spiral out of control. But energy markets will remain vigilant as no ceasefire is without its risks.
US president Donald Trump announced the ceasefire early on 24 June, bringing to an end 12 days of reciprocal aerial attacks that included heavy US bombing of Iranian nuclear sites over the weekend.
The conflict, which began with surprise Israeli strikes on Iran on 13 June, appeared to be headed for escalation after the US strikes against the Fordow, Natanz and Isfahan nuclear facilities that were aimed at blocking Iran's path to developing nuclear weapons. The Fordow site, which is heavily fortified and located deep underground, was crucial to Trump's decision to intervene militarily in Iran, as Israel does not have the military capabilities needed to seriously damage the site. There is "not another military in the world" that could have hit Fordow, Trump says.
The ceasefire was reached despite repeated Iranian warnings that any direct military action by Washington would trigger a response causing "irreparable" harm to the US. The options, Tehran said, could include a direct retaliation against one of the US' many bases in the Mideast Gulf, or the much-vaunted closure of the strait of Hormuz — the world's most critical oil and gas transit route, with about 81mn t/yr of LNG, or roughly a fifth of global seaborne gas trade, as well as a quarter of global crude and refined products passing through it.
Iran has repeatedly threatened to close the strait in past confrontations but never followed through, although it has previously targeted or seized vessels transiting the waterway, prompting some shipowners to consider alternative routes. Iranian lawmakers had started increasingly talking up the move after the US strikes, which grabbed the market's attention. Iran's retaliation ultimately came in the form of a missile strike against the Al-Udeid US military base in neighbouring Qatar on 23 June. But the way it was delivered, giving advance warning to the US and Qatar, suggested the intent was de-escalatory. Within hours, the truce was announced.
Lingering risks
More than 36 hours in, the ceasefire appears to be holding. But some violations by both sides in the early hours, and the history of other ceasefire deals in the region, highlight that while risks have certainly faded, they have not vanished.
For now, concerns about Iran moving to close the strait of Hormuz have largely subsided as Tehran regards its exchange with the US now settled. After all, the closure of the strait was always considered the most extreme of the options that Iran was contemplating, given the huge repercussions it would have on global trade and the significant blowback Iran would receive in response.
Likewise, the threat of Iran lashing out against any of its Mideast Gulf neighbours has subsided. If there is one thing Tehran will have taken from the events of the past two weeks, it is how politically isolated it remains on the world stage, given how little tangible support its long-time allies, such as Russia and China, were willing to provide. Iran's improved relations with its Gulf Co-operation Council neighbours is of paramount importance to the country, and Tehran would think not just twice, but three times before doing anything that could jeopardise this.
Global oil and gas markets have been closely watching the conflict unfolding over the past fortnight and appeared receptive to the de-escalatory nature of the latest Iranian attack. TTF front-month natural gas prices rose by 13pc over the span of a week after attacks began, only to erase most of those gains in the aftermath of the strike on the Al-Udeid base, even before the truce was announced the following day. The Ice Brent crude price made similar moves,rising by 12pc over 13-20 June before falling back to below the 12 June level at the start of this week — including a 10pc drop on 24 June alone.
The market reaction was largely linked to the risk of trade flow disruptions in the strait of Hormuz, particularly after Trump flagged the idea that regime change in Iran was potentially on the table — sketching the kind of existential threat that might have led Tehran to consider a move otherwise extremely unlikely, given its operational complexities and doubtful strategic goals.
A blockade of the strait would have required a large-scale naval operation extending into Omani territorial waters, which, in any event, Tehran would only be able to sustain for a limited period of time. In terms of LNG flows, it would have predominantly disrupted exports from Qatar, while the bulk of crude exports transiting the strait typically head to China — two countries with which Iran enjoys close economic and political ties. China also received 9.89mn t of the LNG that transited Hormuz so far this year, nearly a quarter of total LNG volumes that sailed through the waterway.
But there was perhaps a more tangible risk of accidental disruptions — for instance, stemming from electronic interference, probably caused by military activity in the area — hampering navigation in the Mideast Gulf.
Chain reaction
Yet Israel and Iran have showed a novel willingness to target energy facilities in the early days of the conflict, which has resulted in some supply disruption, albeit on a much smaller scale. Israel hit two gas processing facilities in the southern part of Iran and several oil product depots in the capital, while Iran targeted the 197,000 b/d Haifa refinery, Israel's largest. For the time being, global oil and gas markets are largely spared, as those early targets were limited to downstream facilities serving domestic consumption.
This came at a delicate time for both export markets. Plagued by rapidly falling upstream production, Egypt has been rapidly increasing its LNG imports until its sole floating storage and regasification unit (FSRU), the 170,000m³ Hoegh Galleon, became congested.
And at the time of the first Israeli attacks, Jordan had just released its own FSRU for it to be installed in Egypt later this summer. With no capacity available to replace the shortfall in Israeli imports, Egypt had to ramp up fuel oil imports while curtailing supplies to industries such as fertiliser producers. But an increase in LNG demand could have materialised later in the summer, when Egypt will have more import capacity available and its downstream demand is typically at its seasonal peak.
For the time being, the market appears to be on a course towards normalisation. Leviathan and Karish are preparing to restart production following the nearly two-week closure, with exports to Egypt and Jordan likely to follow suit.
But the situation in the Mideast Gulf is not suddenly free of tensions. The greatest risk that remains is that one of the two main protagonists of the conflict determines that the truce was imposed on it too soon and its aims were ultimately not achieved and therefore opts to renew hostilities.
Israel, in particular, will be watching closely over the coming days and weeks as it becomes clearer just how much damage Iran's nuclear facilities have sustained. If the fighting does restart, it is not inconceivable that we could see production or export facilities, either in Iran or the east Mediterranean, drawn into the conflict.
