More expensive gas, more expensive electricity: Hormuz closure unprecedented, says Tomáš Plocek

The current tensions in the Middle East have once again highlighted how sensitive energy markets are to geopolitical shocks. The conflict involving Iran has significantly increased the risk premium on oil, natural gas and electricity in recent weeks, raising questions over whether this is merely a short-term market reaction or the start of a longer period of higher volatility.

How could the current situation affect energy commodity prices? What scenarios are traders watching in the markets, and what impact could potential price swings have on European consumers and industry? According to Tomáš Plocek of E.ON Czech Republic, decarbonisation could also offer a way forward. In an interview with oEnergetice.cz, he says that high volatility and the costs of resolving energy crises may cast investments in independence in a more favourable light.

Current tensions surrounding Iran have once again brought a significant geopolitical risk premium back to the market. Do you see the current rise in oil and gas prices mainly as short-term nervousness, or as the beginning of a longer period of higher volatility?

I see the current situation as a continuation of the difficult energy situation that was effectively triggered by Russia's invasion of Ukraine. As a result, LNG terminals were built to diversify supplies. We are now feeling the effects of the European market becoming more integrated with the global LNG market, which is more volatile than we were used to. The closure of the Strait of Hormuz is, of course, an extreme situation unprecedented in recent times.

European gas is reacting very sensitively to events in the Middle East. In your view, is natural gas now the commodity through which geopolitical risk is transmitted most strongly into Europe's energy sector?

Natural gas is reacting very sensitively because Qatar's role and its dependence on access through the Strait of Hormuz are crucial and far greater than, for example, in the case of oil. In my view, it is logical for gas to react very sensitively when there are no other terminals that would allow the export of larger volumes of gas outside the Strait of Hormuz.

To what extent could the current situation affect electricity prices in Europe and the Czech Republic? Is it already apparent that more expensive gas is once again pushing up electricity prices in both short-term and longer-term contracts?

Natural gas prices have long been important for setting electricity prices in Europe. As prices of natural gas contracts for future years gradually rise, we can see this feeding through into wholesale electricity prices, not only for the coming months but also for future years.

Oil is traditionally the first commodity to be affected by such crises. Do you think that, paradoxically, gas and electricity could be a bigger problem for Europe this time than oil itself?

All energy commodities are becoming more expensive – oil, gas and electricity – and it is clear that this is a problem not only for Europe, but at least to the same extent for other parts of the world that import them. I see the paradox rather in the fact that the situation has less impact on countries that are independent of energy imports or even export energy, such as the United States or Russia.

How would a potentially prolonged conflict affect prices for Czech customers?

A more prolonged conflict would mean that natural gas and electricity prices would have to rise to a level that reduced consumption of these commodities. Household energy consumption was long considered price-inelastic, but unfortunately in recent years we have learned that when natural gas prices reach around 100 EUR/MWh, households start saving. In a more prolonged conflict, we could reach similar levels.

Could the current tensions also change longer-term thinking about Europe's energy mix? In other words, does geopolitics put the argument of energy dependence back into play, or does it instead strengthen the debate on the need for decarbonisation?

In my view, these two issues are essentially interconnected. Europe is not, and will not be, self-sufficient in fossil fuels. So if we are talking about increasing independence, we are naturally also talking about decarbonisation. High price volatility and the costs of resolving energy crises may cast investments in independence in a more favourable light.

How do you think the current situation is changing the behaviour of traders in energy markets? Have you seen a greater effort in recent weeks to hedge prices in advance and reduce risk, or instead more speculative positions betting on further rising volatility in the markets for oil, gas and electricity?

I do not track the size of speculative positions, but my estimate is that they are rather declining. Risk rises with volatility, and for some players this necessarily leads to the closure of loss-making positions. For those on the right side of the market, a quick profit may in turn lead to efforts to lock it in.

And one less traditional question: does the current situation show that the market may now value uncertainty itself more than the physical shortage of commodities? Is the price of fear one of the most important “commodities” traded by energy markets today?

The global economy is based on continuous energy supplies. Fortunately, we are not in a situation where there is a physical “shortage” of commodities. We can switch on the lights, heat our homes or fill up our cars. Uncertainty about how affordable these essential commodities will be has been, and remains, part of the prices of longer-term contracts.

However, this fear can work both ways. It was not so long ago that, because of the global pandemic, we feared that no one would consume energy, and as a result of those fears we saw extremely low commodity prices instead.