The risk of direct military conflict between the US and Iran following missile strikes by US forces on Iranian General Qasem Soleimani in Baghdad on 3rd January has been reflected in the oil market, given the potential disruption to supplies from the region. Such volatility is set to reverberate across the energy markets, raising the prospect of higher energy bills for customers.
Although supplies of oil remain unaffected at present, prices surged more than 4% in early trading on 3rd January to reach more than $69 per barrel for the front-month ICE Brent Crude contract and – while they ended the session below these highs – prices still closed on the day up by more than $2 per barrel. After a couple of mixed trading days at the start of this week, the latest developments pushed prices back above $71 early Wednesday before retreating to $69.
Dr. Craig Lowrey, Senior Consultant at Cornwall Insight, said:
“These movements and associated risks have resonated across the energy market, with GB gas and electricity prices displaying comparable levels of volatility – Summer ‘20 NBP gas rose by 9% day-on-day on Friday 3rd, while the corresponding Baseload electricity contract saw a 5% day-on-day increase.
“Such volatility could see energy suppliers be swifter to review their tariffs than may otherwise have been the case – given the additional price risks they are experiencing. This could be reflected in higher tariffs for customers going forward or withdrawals of existing fixed-price fixed-duration tariffs.
“The risk of further gains in the market may encourage traders to purchase energy sooner rather than later to cover any market exposure they may have, while a swift de-escalation of the US-Iran situation could lead to the erosion of any risk premium that may have been factored into prices.
“While the long-term impacts on GB energy markets will depend upon the enduring nature (or lack thereof) of the oil price increases, the potential for increased volatility in the oil market due to geopolitical issues – and resultant effects on the gas and electricity markets – is apparent.”