Iran war presents Europe with a mounting energy crisis

• Gas prices could double
• UK chancellor meets North Sea producers
• Competition for LNG cargoes could intensify

The UK and Europe are being forced to review their options for procuring oil and gas as the conflict in the Gulf deepens supply risks. 

The escalation has unsettled energy markets and raised fears that supplies moving through the Gulf could be disrupted.

Analysts say Europe may be forced to compete for alternative LNG cargoes if Qatari shipments are affected, pushing prices higher for import-dependent economies.

The crisis presents London and Brussels “with a massive headache”, according to Gaurav Sharma, an independent energy market analyst based in London. The stability of natural gas supplies is of particular concern given that the crude market is “well cushioned” with a lot of non-Middle Eastern supply, he said.

“The UK’s exposure will have more to do with price spikes, with UK wholesale gas prices up more than 40 percent since Monday as it imports much of its gas from Norway, rather than any problems on the physical procurement side of it. 

“The EU on the other hand would be scrambling for cargoes to temporarily replace Qatari LNG, vying for more gas from Norway, the US and North Africa and paying higher for it.” 

UK chancellor Rachel Reeves met North Sea oil and gas producers this week to discuss the implications of the conflict. Offshore production in the area has been integral to the UK’s energy strategy but the industry is declining due to underinvestment and political clashes over net zero targets. 

The UK imported nearly 43.8 percent of its energy last year, up from 40 percent the previous year, according to official data.

Europe imported 58 percent of its energy in 2023, according to the European Commission (EC), with the US its biggest supplier of oil and LNG, after Norway. The Eurozone sees no impact on its supply but rising prices are a concern, Reuters reported this week. 

The EC plans to convene an energy task force with member states and the International Energy Agency and says it is “closely tracking price and supply developments”. 

Global oil and gas prices have soared as a result of the conflict. Brent crude has risen by more than 10 percent and is around $80 at the time of reporting.

Benchmark gas prices have surged by nearly 50 percent, and analysts predict they could more than double if Hormuz Strait shipping is halted for a month.

“Europe and the UK are more exposed to global energy market volatility because they depend more on imports, especially LNG,” said Carole Nakhle, chief executive of Crystol Energy. The US’s large domestic oil and gas production provides some insulation, she said.

“If tensions ease, that premium could unwind relatively quickly. If disruptions to flows or shipping persist, prices could rise further.”

Europe has few alternatives other than seaborne LNG to meet its gas demand, having almost entirely removed Russian LNG and pipeline supplies since the invasion of Ukraine, said Tom Marzec-Manser, a director at Wood Mackenzie. 

“Asian buyers looking to backfill their lost supply will be competing with European buyers for spare LNG cargoes, many of which will originate from the US, with an upward price impact in Europe.”

The UK would “unquestionably” look to the US, “and compete on higher payouts to Norway with the rest of Northern Europe”, Sharma said. The Gulf might also lean to the US to escort cargoes from the region as Trump “toughs it out” for his stated four weeks.