MNI INTERVIEW: Muted Impact On EU Inflation From MidEast Oil
MNI (ROME) - The inflationary impact on the eurozone from potential Middle East oil disruptions would have “half the firepower” of the 2022 gas crisis, in the absence of a “catastrophic scenario” involving the closure of the Strait of Hormuz, a senior European Commission energy analyst told MNI.
Middle East tensions are preventing oil prices from continuing their recent decline, driven by fundamentals such as weak demand, particularly from China, Manuel Rivas, head of the Market Analysis Team in the Chief Economist Unit at the Directorate-General for Energy at the European Commission, told an MNI Podcast.
This trend is likely to continue unless Israel’s response to Iran’s involvement in the conflict leads to significant disruptions in oil production facilities—an unlikely scenario, according to Rivas.
Should Iran’s 1.7-million-barrels-of-oil per day in exports be affected, prices could temporarily spike towards USD100 per barrel, depending on the severity of any attack, briefly feeding into European inflation, he said. (See MNI INTERVIEW: Risk ECB Undershoots Inflation Not High -Vujcic)
However, the impact would be short-lived due to OPEC’s spare production capacity and “fatigue” within the cartel over sustaining voluntary output cuts.
“OPEC, and particularly Saudi Arabia, could step in to cover that,” Rivas said, adding that OPEC nations may also be incentivised by higher prices and the opportunity to recover some of the market share they have lost over the past decade.
STRAIT OF HORMUZ
The closure of the Strait of Hormuz is a “very low probability,” said Rivas.
“It’s uncharted territory—very difficult to predict what could happen,” Rivas said. In such a scenario, oil prices could easily surpass the USD100 per barrel mark and even break the record near USD150.
This would have significant repercussions on demand, inflation, and could even jeopardise the European Central Bank’s current trend towards easing interest rates, with substantial knock-on effects on prices.
“The impact would be so severe that we would likely [see] interventions in the market,” Rivas noted, highlighting potential commercial responses, the use of strategic reserves, and other measures. However, he added that the likelihood of a sustained price spike is very low.
GAS SUPPLY SAFEGUARDED
Gas supply to the eurozone from the Middle East is not substantial enough to cause major disruptions in gas prices, thanks to the bloc’s adjustments following the 2022 energy crisis. Annual gas consumption has fallen by 15%, LNG capacity has surged, and renewable energy production is growing by 15% each year, Rivas said.
Qatar accounts for only 4% of the EU’s gas imports and 10% of its LNG, with minimal gas arriving from Israel via Egypt, he noted.
While 15% of the EU’s gas still comes from Russia—half via pipelines and half as LNG—this, combined with potential issues in Qatar, could cause some price volatility. Nonetheless, the increased capacity for LNG and the EU’s purchasing power should prevent significant supply disruptions, he concluded.
The upcoming expiration of the gas pipeline contract with Ukraine will not be renewed, Rivas said, and markets are pricing in a EUR5 per MW/h risk premium for future supply. However if Israel’s gas infrastructure is targeted, it would pose a long-term issue for the EU, he added.