As geopolitical tensions in the Gulf threaten to disrupt critical energy trade routes, global markets are once again confronting the ripple effects of higher oil and gas prices.
In this exclusive interview with Wealth DFM, Jean-François Robin, Global Head of Research at Natixis Corporate & Investment Banking, discusses how sensitive the global oil prices are as a result of the geopolitical tensions and which regions are most at vulnerable to prolonged tensions, along with explaining how rising energy prices might affect inflation, and the ways in which the ECB and Fed might adjust their policy paths.
WDFM: How sensitive are global oil prices to a prolonged escalation in the Gulf, and which regions are most vulnerable to prolonged tensions?
JFR: “Although only 20% of oil flows through the Strait, and despite the market expecting an oversupply of oil and gas, global prices have more reacted more sharply than they did in 2022. This is because the additional and marginal production cannot be routed to buyers. It’s more a question of logistics than mere supply.
“An example of this is gas; Europe only imports 3% from Qatar, relying mostly on the US. However, global prices are rising as Asian buyers are overpaying LNG cargos which were heading to Europe.”
“Asia is clearly taking the biggest hit. 82% traffic of Hormuz is heading to Asia, with China importing almost half of its oil and one third of gas from the region. Also, India imports 40% of its gas from Qatar, with only 3% for Europe. The economies which are most dependent on fossil energy, imports from the Middle East, with a small share of renewable electricity in their energy mix, will be the most impacted.
WDFM: How might rising energy prices disrupt the recent disinflation trend and reignite inflation across major economies?
JFR: “This situation differs from 2022, when inflation was already at 6%. Europe was too dependent on Russian Gas (45% then vs 10% today), and electrification has massively accelerated since then. Renewables now account for more than 47% of net electricity generation in Europe.”
WDFM: How could the ECB and Federal Reserve adjust their policy paths if tensions persist?
JFR: “Central banks need to look through the Energy shock as it’s a supply shock. They shouldn’t react; inflation should decrease very quickly when oil and gas prices decline, but the problem is that, the longer it takes, the likelier there might be some second-round effects and dis-anchoring of inflation expectations.
“Pre-emptive hikes are a possibility if oil prices stay high. Central bank rate hikes will have little impact on securing a safe passage or accelerating the electrification of economies, so they are likely to do more harm than good. Their main effect would be to curb demand for oil, gas, and related products. In short, the probability of Fed rate cuts is declining rapidly, while the likelihood of ECB rate hikes is, unfortunately, increasing.”
WDFM: You mention the risk of a “stagflation” environment, what should investors be monitoring?
JFR: “The destruction of demand due to higher energy prices. Inflation is easier to monitor than the impact on growth so confidence indicators will be key.”
Jean-François Robin
Jean-François Robin is Global Head of Research, Natixis Corporate & Investment Banking. In this role, Jean-François advises Natixis’ major clients including Central Banks, Sovereign Wealth Funds, Insurance Companies, Asset Managers and Corporates. He is among the experts consulted by the European Central Bank’s Market Contact Group and by the European Commission and Parliament, and is a regular commentator on economic and market affairs in the French and international press.
Jean-François started his career in 1996 at the Banque de France as Deputy Director in charge of Portfolio management and monetary operations. In 2001 he joined Natixis’ Corporate & Investment Banking division as a sovereign debt trader in charge of credit default swaps and later credit product trading. He joined the Global Markets Research team in charge of strategy in 2007 and took up his current role as Global Head of Research in 2018.
