Tim Wallace
Donald Trump prepared for his war with Iran by dispatching what he described as “an armada”, seeking to intimidate the now-deceased ayatollah and his cronies with a floating display of American might.
He might not have expected another armada to return in the opposite direction within weeks of starting his bombing campaign.
Rather than military vessels, this new fleet is formed of supertankers, traversing the Atlantic in search of oil and gas that can no longer be collected from the Persian Gulf.
Iran has closed the Strait of Hormuz, shutting off key suppliers including the liquefied natural gas (LNG) superpower Qatar. Meanwhile, America has blockaded Iranian ports in the region.
The next best destination, shipping lines, traders and captains believe, is the Gulf of Mexico.
If they can pick up US hydrocarbons, grateful European and Asian customers will happily pay through the nose for supplies which replace those lost from the Middle East.
Oil is trading at close to $US100 ($140) per barrel, up from around $US70 before the war. Natural gas in Europe costs €45 ($74) per megawatt hour, an increase of nearly 50 per cent on pre-conflict prices.
But analysts say it is not clear whether the waterborne rescue mission will have much immediate impact.
Ronald Pinto at Kpler, an energy research group, says there is only “limited room” for America to increase exports.
“Not only in the US but also around the world, most LNG facilities are operating at very high utilisation rates at the moment,” he says.
“Those projects that have been adding capacity will be able to export more as that capacity is available. But there is not a lot of room from existing projects which are underperforming and can ramp up.”
He notes that Qatar supplied six to seven million tonnes of LNG per month before the war. Last month, US exports only increased by around half a million tonnes.
“It is true that gradually those exports from the US have been increasing in the last few months. But it is not at the same pace that we see the loss of Qatari supply,” says Pinto.
It leaves European and Asian buyers competing to buy those supplies, sometimes with vessels changing destination while at sea, as a new customer outbids the previous buyer.
A sanctioned Chinese tanker was turned back in the Strait of Hormuz by the US navy after Xi Jinping appeared to test Donald Trump’s blockade earlier this week.
In terms of extraction, US producers can ramp up oil and gas output more quickly than those in many other nations.
This was one of the major developments of the shale boom, in which nimble energy companies could “drill, baby, drill” and bring new supplies online at pace.
But those companies are more cautious this time around. Businesses are reluctant to spend heavily when prices could tumble again and leave them high and dry, particularly if that involves borrowing at today’s elevated interest rates to fund new production.
“US producers are able to respond much more quickly to changes in global oil prices than other suppliers worldwide,” says Kieran Tompkins at Capital Economics. “However, even when US producers were extremely price-sensitive, it typically took three months before output could respond to a shift in prices.
“The latest survey of oil and gas producers showed that while small producers were keen to raise output, larger ones are more hesitant. Capital discipline among large suppliers has been much more of a feature over the last five years or so.”
The next problem is securing enough ships.
Crews marooned outside Hormuz can certainly make better use of their time by sailing the Atlantic.
But that also means a much longer journey to take shipments from the US to Asian markets, compared to the previous short trips from the Persian Gulf to Pakistan, India or China.
It might give European buyers an edge; ships nipping back and forth across the Atlantic can complete more deliveries than those on the long journey to the other side of the world. However, it is an added burden for hard-pressed Asian importers who face a premium to cover the extra costs, says Claire Jungman at Vortexa.
“Tanker availability becomes a constraint. Replacing short-haul Gulf exports with Atlantic Basin barrels increases ton-miles and ties up ships longer, tightening vessel supply and lifting freight rates,” Jungman says.
“Europe is better placed than Asia to pull in additional US crude and products due to shorter voyages and more favourable freight economics. Asia can still buy more US supply, but longer routes increase vessel use and materially raise delivered costs, leaving Asian buyers more exposed.”
At least the American companies which are exporting can cash in on prices they could only have dreamt of six weeks ago.
For Trump, this represents something of a double-edged sword.
Publicly, he has welcomed the tankers’ arrival as “GREAT!!!” with three exclamation marks.
As a president who wants to turn around America’s trade deficit and boost exports, it represents a valuable opportunity: his war has stamped on the competition and jacked up the price of oil and gas.
‘US crude markets are going to be tightening and the price is going to be moving upwards. That’s going to feed through and mean US consumers are paying more.’
Energy Aspects analyst Richard Bronze
Now the US is a net exporter of fossil fuels, which is a direct boost to the country’s GDP and to the profits of its energy industry, as shown by the performance of share prices since the war began.
Even as the S&P 500 index of leading shares has dropped since the war began, shares in America’s energy companies have risen 4 per cent. Some have climbed considerably, with APA up more than 30 per cent, Valero Energy gaining nearly 20 per cent and Diamondback Energy rising by 14 per cent.
But there is a downside, too.
Trump also campaigned on a pledge to cut the cost of living. The war has already driven up the price of gasoline for American drivers, with instant effects on inflation and on expectations for borrowing costs.
Even if the tankers cannot make up for the entirety of lost supply from the Gulf, they are still piping oil and gas from a market with already-rising prices.
That will put further pressure on the price of fuel on American shores, riling households and businesses, which face yet another cost of living crunch.
Richard Bronze at Energy Aspects says this is already being felt and will only get worse in the coming months.
“US crude exports are going to reach very elevated levels in April and May, because of this pull from Asia and from the rest of the world for supply. As that happens, US crude markets are going to be tightening and the price is going to be moving upwards,” he says.
“That’s going to feed through and mean US consumers are paying more.”
Telegraph, London
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