The Telegraph: Trump’s war on Iran triggers surprising divergence in prices between Middle Eastern and Western supplies

For years, global oil prices existed in a kind of harmony, rising and falling in step with each other as the ebbs and flows of supply and demand moved them in near lockstep.

But now the US and Israeli assault on Iran and its closure of the Strait of Hormuz has changed all that.

In recent days, oil prices have splintered sharply – leading markets into uncharted waters and posing risks to Europe.

The $160-a-barrel price on offer for Middle Eastern crude oil is a sign of a market out of kilter and gives a frightening glimpse of what’s coming to Britain, say experts.

The price of Dubai crude oil is one of the three most important global oil price benchmarks, alongside Brent and West Texas Intermediate (WTI) – and normally they all sit fairly close together.

Before the conflict all three were hovering around $70 a barrel but each one is trading at a different price, with US prices much cheaper than European and Middle Eastern barrel.

It’s an imbalance that has rarely been seen in global energy markets, with many seasoned energy watchers surprised by the different trajectories.

“Global energy markets are in uncharted waters,” says Tom Kloza, a veteran oil analyst.

“I don’t think anybody was prepared for this. It is absolutely extraordinary. There is no real playbook for how to deal with it and everybody is making things up as they go along.”

Brent crude, typically seen as the benchmark for UK and European prices, has risen sharply to around $111 a barrel.

But WTI – the benchmark for US oil prices – is currently trading sharply lower at $98. Normally, the gap is only around $3.

Both are alarming in their own way. But is it the price of Dubai oil, shipments that can be rapidly delivered, that is setting off the most alarm bells. This has soared to $160 a barrel and is rising fast.

It’s probably the biggest divergence in prices between the Middle East and Western supplies for years. So what’s going on? And what does it mean for our own energy bills?

Goldman Sachs and other analysts suggest the underlying cause for the spike in the Dubai price is that refineries in the Middle East and Asia are simply desperate for more supplies.

Many of these refineries have been built specifically to process Middle Eastern crude – meaning they are unable to use Brent or WTI oil in their production.

That may sound like less of a problem for Britain. Not so, says Greg Newman, the chief executive of Onyx Capital, London-based oil traders.

“Oil gets moved around the world according to where the higher prices are and these prices will be coming to Europe too,” he says.

“The kind of numbers seen for Middle Eastern crude are what we can expect for European prices soon.”

Newman says the impact of higher energy prices will soon spread from the energy sector into every corner of the economy – driving up prices for food and forcing up inflation and interest rates.

Both he and Goldman Sachs warn that an extended conflict could see the US forced to restrict its own exports, a move that would prompt another surge in prices.

Although that has been ruled out by the Trump administration for now, there are nagging fears that the plan could be revived if the conflict continues.

“The US is talking about shutting off exports. Europe will really struggle soon,” Newman warns.

‘Prolonged disruption’
Ed Crooks, of global analysts Wood Mackenzie, says that just one number tells us much of what we need to know about what’s coming.

Crooks says: “Amid all the statistics from the Iran war about missiles fired and sorties flown, only one number really matters for energy and the world economy: the number of vessels passing through the Strait of Hormuz.

“In peacetime, about 150 to 175 ships would move through the Strait each day. That number has been down to eight to 10 a day according to our VesselTracker service.”

Some oil is still getting out of the Gulf via Iranian and Chinese tankers and pipelines controlled by Saudi Arabia and the United Arab Emirates, but those routes can carry less than half the shipborne oil that should be flowing through the Strait of Hormuz, which means the shortages will continue and the deficit will grow.

Crooks says a “prolonged disruption” in Hormuz could send oil prices to $200 a barrel.

That compares with the $147 per barrel peak reached in 2008 – roughly equating to $241 today with inflation.

But some analysts say a prolonged Hormuz shutdown could see even that record broken.

The reason is the scale of lost supplies.

Global demand for oil currently stands at about 104 million barrels a day and the Gulf conflict has removed nearly a fifth of what’s needed.

For gas, the world consumes just under 12 billion cubic metres a day.

About 13pc of that is traded as liquefied natural gas (LNG) – and about a fifth is produced in the Gulf.

That small proportion suggests events in the Gulf shouldn’t matter too much in terms of gas prices.

‘The fog of war thickens’
However, Norbert Rücker, the head of economics at Julius Baer, says it is a mistake to assume gas prices will be less hard hit.

He warns that the ability to turn gas into a liquid and transport it around the world is turning what were once regional gas markets based on piped gas into a globalised pricing system.

That means even small shortages in one part of the world drive up prices in all others.

“The stress level rises, escalation fears dominate, and the fog of war thickens.

“This lifts energy prices for the time being and increases the risks of short-sighted, political interferences such as trade restrictions intensifying and prolonging the energy price spike,” he said.

That spike could be with us for a while.

Saad al-Kaabi, the chief executive of QatarEnergy, said on Thursday Iran’s strikes had knocked out two of Qatar’s 14 LNG processing “trains” and one of its two gas-to-liquids facilities.

That has cut nearly 13 million tons of liquefaction capacity every year for the next three to five years.

Ed Cox, the global lead on LNG at commodity analysts ICIS, said the world faces gas shortages until at least May, with price impacts that could last years.

In January, European gas prices were hovering below €30 per megawatt-hour (MWh) but now they are double at €60.

If prices are rising everywhere, the splintering of WTI with Brent and the Dubai benchmarks have a particular nuance important to the wider context of the war.

‘The privileged continent’
The prices faced by Americans are much lower than those hitting almost everyone else.

While WTI has remained below the heights of its two peers, gas prices have also done the same.

UK and European prices are €60 per MWh with the prospect of hitting $120, but in America they are less than €10.

“We Americans are the privileged continent in terms of energy, thanks to our shale and crude oil and natural gas,” says Kloza.

“There is a $60 difference between the haves and the have-nots, which is the countries that buy crude oil from the Persian Gulf. That is absolutely stunning.”

Donald Trump put it another way: “When oil prices go up, we make a lot of money.”

He could be right. Analysts estimate that US LNG companies could earn more than $1bn per week in additional profits because of surging global energy prices.

If the conflict persists for four months, windfall profits could reach $33bn above the pre-war average.

Over eight months, this figure is expected to rise to more than $100bn.

That’s a massive transfer of wealth from Asia, Europe and elsewhere to the US.

Americans are still bearing the brunt of higher prices: pump prices rose 33pc in the past month, according to the American Automobile Association.

That sounds bad, but we don’t need to feel sorry for them. In the UK, prices were already higher with diesel up 21pc to £1.64 per litre and petrol up 10.5pc to £1.44.

It means Americans can still fill their petrol tank for half the price we pay. And if Trump continues the conflict, we could soon be paying a whole lot more again.