Oil Hits $95, Gas Tops 70 Euros as US-Iran Truce Lapses
Belgrade economist Velimir Lukic warns the world is entering a new cycle of energy market uncertainty after the US-Iran agreement expired and oil and gas prices climbed further.
The price of a barrel of crude oil crossed $95, and the news agency Blic cited market moves the same day to report a figure as high as $97 a barrel. European gas prices climbed above 70 euros per megawatt hour. The trigger was the expiration of the memorandum of understanding between the United States and Iran, signed on June 17 for a 60 day period, which will not be renewed. Velimir Lukic, a professor at the University of Belgrade’s Faculty of Economics, explained the situation to Serbia’s public broadcaster RTS.
The memorandum called for a halt to armed hostilities and, despite occasional violations, had until now acted as a stabilizing factor for energy traders. That anchor is now gone.
“The memorandum of understanding signed on June 17 between the US and Iran, covering a 60 day halt to the armed conflict, has expired and will not be renewed. Despite every violation, that memorandum still helped calm the situation on the energy market,” Lukic said.
He added that the absence of any military agreement is now adding further uncertainty among traders. He summed it up for RTS:
“All signs point to us entering a new cycle of heightened tension and uncertainty on the energy market.”
The scale of the price increases already shows up in the aggregate figures. Over six months of conflict in the Middle East, global energy imports have grown $330 billion more expensive. That is a cost that energy importers worldwide ultimately paid through higher prices for oil, gas and refined products, including European economies that lack enough domestic production to shield themselves from the surge.
On the supply side, additional pressure is coming from Russia, which has halted diesel exports. The move sparked panic on the derivatives market, and the profit margin for companies trading diesel is, according to Lukic, at a record level. On top of that comes a logistics problem Europe has been dealing with since summer.
“Besides the Strait of Hormuz, this year we also had trouble because of low water levels on the Rhine River and the delivery of energy supplies. The situation on the energy market also depends on the level of countries’ strategic reserves,” Lukic said.
Gas carries a particular problem because, unlike oil, it is far more sensitive to the season: it matters more in winter, and reserves are typically filled during spring and summer, when the price is lower. That cycle has been disrupted this year.
“This time we did not have summer months in which gas prices were affordable enough for those responsible for filling gas reserves to accept that price. The elevated price discouraged replenishment, and now we have a situation where some countries, such as Germany, have filled their storage to just over 50 percent, while at this time last year it was almost 70 percent full,” Lukic said.
The gap between 50 and 70 percent storage capacity in Germany is not cosmetic. It means Germany, as the largest European economy and the continent’s biggest gas consumer, will be heading into winter with smaller reserves than last year, at a time when the spot price is already elevated.
The domestic market, Lukic assessed, is not directly hit by global trends, but it certainly feels the consequences. Serbia’s contract with Russia’s Gazprom for gas deliveries expires on September 30. Lukic recalled that all of Serbia’s previous agreements with Gazprom were extremely favorable, but that their duration has been shrinking over the past year.
“That term was first shortened to six months, this year to three months, and we expect to conclude a new gas agreement that will probably not carry an excessively long duration,” Lukic said.
In his assessment, the shortening of these terms is no coincidence. Reaching an agreement with Gazprom is always the result of two things: current market trends and Serbia’s geopolitical position. The shorter terms, Lukic says, suggest that the relative weight of Serbia’s geopolitical position in those negotiations is now growing, and could strengthen further.
We have written about gas before, when the price in Europe first reached 70 euros per megawatt hour and Serbian storage facilities were full ahead of winter. The difference now is that a concrete trigger has been identified: the expiration of the US-Iran memorandum, combined with halted Russian diesel exports and insufficiently filled storage in Germany. The next milestone for the domestic market comes at the end of September, when the current Gazprom contract expires, while the risks to supply remain tied to the Strait of Hormuz, the state of strategic reserves, and the established routes for delivering energy to Europe.
