Oil Rebounds Amidst Concerns over European Gas Security

Oil Rebounds Amidst Concerns over European Gas Security

The global prices of crude oil rebounded midweek amidst growing concerns over European gas security following a pipeline leak.  Traders said the market has started to monitor US stockpile data for cues about the demand trajectory of the world’s largest oil-consuming country.

International benchmark crude Brent traded at $88.08 per barrel, up by 0.49% from the closing price of $87.65 a barrel in the previous trading session on Tuesday.

The American benchmark West Texas Intermediate (WTI) traded at the same time at $86.33 per barrel, up 0.42% from Tuesday’s close of $85.97 per barrel.

European gas prices rallied yesterday as sabotage is suspected to be behind a pipeline leak. The incident raises concern over the vulnerability of European pipeline infrastructure.

TTF rallied more than 12.5% coming close to EUR50/MWh – a level last seen back in April, ING commodities strategist said in a note.

The catalyst for the move was the Finnish government announcing that it is treating a leak detected along the Balticconnector gas pipeline over the weekend as a deliberate act of sabotage.

The pipeline has an annual capacity of around 2.6 bcm and runs between Finland and Estonia. It is expected that the pipeline could take months to repair.

While this gas pipeline is not important for the wider European gas market, if it turns out that the leak is due to deliberate sabotage, it obviously raises significant concern for European energy security and highlights the potential vulnerability of other European pipeline infrastructure, particularly as we head into the winter months.

Oil prices held relatively steady yesterday as the market continued to digest developments in Israel.  If the conflict is contained to Israel and Hamas we would expect the current risk premium to slowly erode.

However, there is still a risk that this escalates, particularly if there is any Iranian involvement.  ING commodities strategists said under this scenario, stronger enforcement of US sanctions on Iranian oil would tighten up the oil market through 2024. 

Oil markets were relieved since supply from Iran, a major OPEC+ member, is required to meet rising demand in the post-pandemic era.

Iran received a lot of attention as it declared its full support for Palestinian resistance groups fighting Israel. Regardless, Iran denied any involvement in the Hamas attacks on Israel, claiming that ‘the accusations linked to an Iranian role… are based on political reasons.’

Nonetheless, there are concerns that the dispute would spread to other nations, considering that Saudi Arabia and Israel were holding discussions to repair relations through US mediation.

Saudi Arabia and Israel have no diplomatic relations, and Riyadh insists that any agreement to normalize ties with Tel Aviv include a component to advance efforts to establish a Palestinian state, concessions that Israel has so far flatly rebuffed.

The deal, which would include a key mutual defence pact and weapons deal with Washington, would also see Saudi Arabia boost oil production next year.

However, US-based investment firm Goldman Sachs said the escalation would at least cause a temporary delay to the proposed normalization of Saudi-Israeli relations and an associated boost to Saudi production while maintaining its $100 per barrel Brent forecast by the end of the second quarter of 2024.

Investors are now looking forward to the release of US crude oil inventory data from the American Petroleum Institute (API) later on Wednesday and the Energy Information Administration (EIA) on Thursday. If US stockpiles decline, prices will continue to increase as a draw in inventories signals bullish demand in the world’s largest oil-consuming country. Dangote Denies Price Cut for Cement