The attacks on Wednesday and Thursday 18/19 March on Iran’s South Pars gas field and the world’s largest liquified natural gas facility in Ras Laffan, Qatar, which reportedly suffered “extensive damage”, seems to be the escalation in the conflict which energy markets had feared since the outbreak of hostilities.

European natural gas prices are back above €60/MW, while Brent crude topped $110/barrel (€96/barrel) on Thursday morning.

The bigger concern is that financial markets are now pricing in disruption to gas supplies for much longer.

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In Figure 1, we can see the future prices for European gas for the next seven quarters on the week before the conflict began, those prices on the Wednesday of the first week of the conflict and the market on the morning of Thursday 19 March.

In the first week of the conflict, there was a price jump, but it was mostly at the near end of the curve, which implies that markets were presuming any disruption would be relatively short-term in nature.

Following the attacks this week, the higher prices now extend far into the future. In the week after the outbreak of hostilities, gas prices for 2027 delivery were little changed from where they were the week prior. Now, gas for 2027 delivery is between 50% and 90% higher.

While these futures prices are only an indication as to what market participants think will happen, it does matter for major gas consumers in Ireland where companies use these markets to lock in prices for long-term delivery. Increased prices so long into the future will inevitably mean the price of electricity will rise.

Fertiliser

For fertiliser prices, it also means that there is no relief in sight. Europe imports practically zero fertiliser from Iran, but the global shortage caused by a lack of supply means prices have already pushed higher everywhere, including Europe.

The gas price is an important driver here, with the commodity accounting for around 70% of the cost of nitrogen fertiliser production.

There are still hopes for deescalation of the conflict in the Middle East, but if the damage to facilities which has already occurred is as bad as reported, then even if it were to stop today, we could see higher gas and fertiliser prices for a significant portion of this year.