Facts matter but so does the context and in particular the forthcoming elections in Israel and the United States. History suggests that both could cause unpredictable events during October – a month often associated with surprises.

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To begin with the facts:

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– More oil is now transiting the Strait of Hormuz – in most cases in smaller vessels which can make ship to ship transfers in the relatively safe area further out to sea in the Gulf of Oman and beyond. The number of ships and the volumes of crude being carried vary from day to day and there is no consensus on precise numbers. Daily activity is determined by the extent of continuing hostilities, particularly missile attacks from Iran which have been sporadic but highly disruptive.

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After a surge at the end of September transit numbers have fallen in the last few days because of renewed attacks. The best estimates suggest that exports through Hormuz are still around 3.5 million barrels per day below prewar levels.

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– Most of the crude oil being exported appears to be heading East and there are unconfirmed reports that there have been deals between China and the Gulf States, possibly including Iran, to make sure the transits can be made.

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– The cost of this complex export process, involving ship to ship transfers is considerable. To that can be added the insurance costs involved. There is no single standard rate and the charges vary from vessel to vessel but insuring a supertanker valued at $ 200 million has risen from prewar levels of around $ 500,000 to between $ 12 and $ 20 million. That is why despite some increase in transit volumes the oil price remains above $ 100 per barrel with Brent more than $ 10 more expensive than WTI because of the transportation costs involved. Forward oil markets still assume that the disruption is temporary, and normality will soon be restored, a judgment which demonstrates the distance between Wall Street and the Gulf.

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– At the same time, stocks of crude and products are low after six months of drawdowns under the original IEA scheme. China, having imported around 12 million barrels per day before the war cut the volume by 4 to 5 million barrels per day in period between March and June. Since then, imports have gradually increased and the best current estimate is that they will reach a level of something over 9 million barrels per day in November and December.

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– The exports now passing through Hormuz are of crude, not products. Product exports of diesel and jet fuel remain minimal, a fact which continues to drive the increase in prices being experienced in Europe, the US and elsewhere. The direct consequence is the continuing rise in price of diesel. European wholsesale diesel prices are currently 130 per cent higher than they were at the beginning of the year.

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– The US has continued to export crude and products over the last few months but President Trump’s threat last month to cut off much needed diesel supplies to Europe has made the trade explicitly political. That threat appeared to have been removed following the commitment from France and Germany to drawdown their own stocks but the issue is not completely settled. Some reports suggest that the French and German commitments referred to stock releases already agreed under the initial IEA agreement announced on March 11th.

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– The continuing problems are not restricted to diesel and jet fuel supplies. Exports of naphtha and urea through Hormuz are also minimal causing shortages and increased costs through the key supply chain of food supply and petrochemicals. Urea and ammonium nitrate delivered to Europe saw prices spike in the period immediately after the war began. That has stabilised with an increase of around 25 per cent since the beginning of the year. Naptha prices have risen by around 45 per over the same period.

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– Beyond Hormuz crude oil exports are moving out of the region by other routes – including the East West line across Saudi Arabia which is partially but not totally reopened after the drone attack by the Houthis at the end of September. Supplies are also passing by land to Fujairah on the southern Omani coast.

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– To add a twist to the situation, President Trump announced on October 9th that he was relaxing sanctions on Russia in order to buy substantial amounts of diesel. A Russian spokesman suggested that the volumes involved that would amount to 300,000 tonnes in October and 500,000 in November, with more to come later. Industry experts suggested that these volumes might not be compatible with the needs of the Russian domestic market given the damage done to Russian refineries by Ukrainian drones. One of the ironies of the situation is that Mr Trump might now end up selling some of the diesel supplies he is due to receive from Russia to Europe – at a price. Such is the art of the deal.

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– The next looming problem concerns Natural Gas. Almost no LNG is being exported from the Middle East. The Qatari LNG terminal at Ras Laffan remains largely out of action, and force majeure cancellations of supply contracts now stretch to the end of the year. Repair work on the terminal has begun but is far from complete. The resulting shortage is about to become evident because of the failure of European countries – including in this case the UK - to build stocks.

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– European gas stocks are currently at 73 per cent of capacity, materially lower than normal for this time of year. In Germany, Europe’s largest consumer of gas, stocks are estimated to be 27 per cent below the average of the last five years, with only 59 per cent of capacity full. For the moment Europe continues to rely LNG supplies from Russia, but that flow is due to end by January 2027 under sanctions legislation. It is unclear whether the EU having strongly criticised President Trump’s decision to relax sanctions on diesel supplies from Russia will delay its own sanctions on LNG imports.

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– UK stocks are around 30 to 40 per cent full but the volumes are tiny because storage capacity in the UK is less than one seventh of the capacity in Germany, and only a quarter of the level in Holland and France. This reflects the UK’s willingness to rely on imports – a bet which could turn sour if the supply problems continue and there is fierce international competition, including from Asia for any LNG supplied which are available worldwide.

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– The net result is that the gas market is likely be very tight through the rest of the autumn and winter with great competition for resources particular at times when the weather is cold. The European Union imports over 90 per cent of its daily gas needs, the UK over 60 per cent. The UK Government has failed to approve the development of the Jackdaw field in the North Sea which could have limited the requirements for imports this winter. It appears that too many countries are relying on supplies from two main sources – Norway and the US. In Norway’s case, supply is now at the limit of current capacity. US exports have supported European needs for the last six months but could be constrained by political decisions in Washington if America First becomes the guiding principle of economic policy.

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– Meanwhile in Yemen the Houthi advance continues. The attacks over the last three days on Saudi facilities including the international airport in Riyadh have demonstrated the strength of the Houthis and the threat they pose even to a country which has spent billions of dollars on defence. The UK and other governments have advised against all but absolutely essential travel to Saudi Arabia. The Houthis have told travellers to avoid all airports in the Kingdom and warned oil workers in Saudi Arabia that their workplaces are now being targeted. Red Sea trade, taking millions of tonnes of goods in all forms through the Suez Canel remains open but the situation is tense and again insurance rates have gone up. Shipping costs have also risen as seaborne trade between Europe and Asis is redirected around the Cape.

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Rising prices and the potential for political surprises

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Given that context, and in the absence of any visible “peace settlement”, the autumn looks set to be period of rising prices particularly of products such as diesel, food and petrochemicals. For those who cannot afford to pay the result will be physical shortages. Governments across Europe and beyond will be under intense pressure to protect consumers, key services such as health care and food supply (both of which depend on the use of diesel) and energy intensive businesses facing a further loss of competitiveness. The implications for public finances, investment confidence and bond rates are already having a negative impact on economic growth.

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Those are now the consensus expectations within the energy industry of what happens next. But rational expectations can be a poor guide to actual outcomes, especially in election years.

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There is a strong tradition, particularly in American politics, of pre-election surprises.

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Moving from facts to speculation what could happen over the next month?

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– In Israel, where voting in the General Election takes place on October 27th there must be a possibility that Mr Netanyahu with or without open support from the US will seek to achieve the regime change in Tehran which he has sought for decades. Success would keep him in power and would transform the politics of the region and the energy market.

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– In Washington President Trump, facing growing public and political hostility to the war, could simply declare “victory” and accelerate the closure of US bases and the withdrawal of US troops which has already been occurring over recent months. The Gulf States, Europe, Ukraine and everyone else could be left to fend for themselves. This might not look much like a victory but a focus on homeland security probably produces more votes in US mid term elections on November 3rd than current protracted and costly sense that American power has been defeated. A US retreat would enable Iran to assert full control of trade through Hormuz but would not bring stability to the region not least because it would shift the balance of power in each of the numerous persistent conflicts across the region – from Lebanon to Gaza to Yemen.

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– In Moscow, President Putin could find it a convenient moment to call a ceasefire in the military exercise in Ukraine in return for a limited realignment of territory, the neutralisation of Ukraine outside NATO, an end to sanctions and a large scale lucrative American investment in Russian oil, gas and mineral resources.

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– Finally, there is the risk of escalation of physical conflict across the region. The Houthi attacks over the last few days have drawn the Saudis into a new war. Retaliation from Riyadh, helped perhaps by US and even British support, could expand the conflict. Saudi Arabia remains the world’s second largest exporter of traded oil after the US. Any interruption of supplies by further attacks on the export terminals at Yanbu, Ras Tanura or the East West pipeline could be far more disruptive to the global energy market than anything we have seen so far.

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Mentioning these potential surprises can well be dismissed as pure speculation, but as the last nine months have shown the whole region is inherently insecure, not least because of the absence of any effective stabilising forces at the global level.

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The international energy market is inseparable from what happens in the region and consumers, investors and the Governments of importing countries are essential passive price takers in an environmental beyond control.

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That is not a comfortable position.‍

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Nick Butler

Visiting Professor, King's College London

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