Everything points to the agreement ending the U.S.-Iran war being signed on Friday, and this has excited the markets, pushing Brent crude slightly below $80 per barrel.Of course, the devil is often in the details in these situations. We’re already seeing some signs of this, such as Iran’s ability to sabotage the agreement if it deems it in its interest to do so—by having Hezbollah strike Israel, knowing that Israel will retaliate, as Ian Bremmer of the Eurasia Group correctly observed.
Even U.S. intelligence agencies are reportedly expressing doubts about Iran’s true intention not to acquire nuclear weapons. Clearly, the regime in Tehran wants to sell its oil and benefit economically from the partial—if only partial—lifting of sanctions.
It also knows how desperate President Trump is for energy prices to fall ahead of the November elections, where he is staking everything on the outcome. This is because the Republicans risk losing control of the Senate, which could lead to Trump himself being impeached by them. So if the Iranians want to punish Trump, they’ll look to extract the maximum economic benefit before undermining the agreement in some way.
This would mean higher energy prices for consumers and businesses down the line. It’s one possible scenario, but it doesn’t seem far-fetched.
For now, the price of Brent crude had fallen yesterday to just under $80 per barrel, which was about 10% higher than the price of $72.50 before the war in Iran.
On the other hand, the price of Brent crude was 28% lower than the $110 price at the end of March, based on the average closing price of futures contracts.
Whether this decline in international prices will be reflected at the pump is another matter. The answer should be yes, but it may take more time, and the decline may not be to the same extent.
On the other hand, the price of European liquefied natural gas (TTF)—the “bridge fuel” for the green transition, as it is called—stands at 42.5 euros, compared to 32 euros before the war in Iran. This means it has risen by more than 30% compared to that time.
In April, the price rose to 52 euros, its highest point. Since that peak, it has fallen by about 18%.
Why hasn’t the price of natural gas fallen in line with the price of oil, despite the increase in LNG production from the U.S.? The answer is simple: Qatar.
Yesterday, we learned that Qatar notified LNG buyers that production would rise to 50% of production capacity within one month of the full reopening of the Strait of Hormuz and to 80% within two months. This news was viewed as positive in the short term but is not as positive in the medium term.
This is because Qatar’s LNG production cannot return to 100% until the damage caused by the Iranian strikes on the Ras Laffan facilities is repaired. Even if the U.S.-Iran agreement is upheld, the price of LNG cannot return to its previous level, since Qatar’s production is estimated to be reduced by 17% in the coming years.
In this sense, there is a structural reason—regardless of any agreement—why LNG prices will not fall below a certain level. Given that this is the fuel that determines the price of electricity, the consequences, especially for the EU, are clear.
So let’s enjoy the short-term relief rally in the markets, because later on, fundamentals—and possibly politics—may cause turbulence.