Oil Market Speculations
As tensions with the Middle East raise improbable concerns of conflict beyond rhetoric, the hike in oil futures has the world questioning just how long Iran's threats will go on. Faced with trade embargoes from the West and fears of a possible attack on its nuclear installations, Iran has been threatening to close the world's most critical oil shipping passageway, the Strait of Hormuz, since December. Despite the media's portrayal of the prospect of the situation escalating to involve military action, the real threat is how the long-standing high oil futures will affect the growth of the economies around the world.
While the market factors in the high risk of a potential oil disruption, Americans are feeling the pinch in their wallets with gasoline prices soaring well over $4.00 per gallon in several states. Before the deterioration of the situation with Iran, the global supply chain was already down. Lower production in Syria and Yemen as well as the closure of an important pipeline in Sudan this year have taken at least 500 million barrels per day (bpd) off the market, if not more, according to Caroline Bain of the Economics Intelligence Unit.
“So the market has tightened anyway,” Bain says. “But the main factor is how Iran is coping with the EU embargo, whether other countries can fill the gap and whether or not the tensions between Iran and the West could lead to some sort of military conflict in the Strait.”
Should Iran carry through with its threats, however, the U.S. Navy, stationed off Qatar, would be able to intervene and reopen the Strait within a matter of days. However, events have not escalated enough to warrant higher prices, so “the geopolitical risk premium in the market is a bit overdone at the moment,” says Bain.
Israeli intervention would also be highly unlikely with too much at stake as the global economy struggles to pick up from recession. According to Bain, Israel would be under considerable pressure not to attack Iran, because it would cause “further retaliation in reaction in addition to the risk of losing U.S. support.”
The greatest risk the situation poses now is its impact on world economic growth. The high prices of oil are being felt around the globe, and will hinder the growth of emerging and developing economies should they be sustained.
The West's policies to contain Iran will continue to have a dramatic effect on oil prices unless Iran's April elections bring in a new political regime that desires to ease current tensions. Without a shift, however, “one could expect the premium we see now to continue throughout the year,” Bain says. Of course, it's unsure that a new government would even change the situation, or how quickly.
“At the moment, there is so much uncertainty about what the impact of the embargo and sanctions are going to be until it becomes clear that it's either a desperate situation or it's not nearly as disruptive as the market thinks,” says Bain. “Having said that, the prices at current levels will damage economic growth.”
While Iran is enjoying the higher prices, they are expected to drop later in the year once the country turns to Asian markets and the EU fills its gap in supply through other sources. The embargo currently accounts for about 300 million bpd of lower production in Iran, but that's also due to a lack of investment in the country's aging fields over the last decade.
“Thus, it's very much in their interest to keep the prices as high as they can,” says Bain. “Oil prices are key, and perhaps the only thing keeping their economy going.”
Although shutting down the Strait would be detrimental to Iran's economy, it all seems to be going Iran's way for the time being. More recently, threats to cut exports to the UK and France stole headlines and sent oil prices up, but didn't have a major impact on the fundamentals of the oil market. Not to mention the UK hasn't imported any oil from Iran for over six months and France's imports would have only been affected a few percent.
Based on speculation, oil futures remain high as governments continue a tactical game of rhetoric.
Ofwat allows retailers to raise prices from April
Retailers can recover a portion of excess bad debt by temporarily increasing prices from April 2022, according to an Ofwat statement.
The regulator confirmed its view that levels of bad debt costs across the business retail market are exceeding 2% of non-household revenue, thereby allowing "a temporary increase" in the maximum prices. Adjustments to price caps will apply for a minimum of two years to reduce the step changes in price that customers might experience.
Measures introduced since March 2020 to contain the spread of Covid-19 could lead to retailers facing higher levels of customer bad debt. Retailers’ abilities to respond to this are expected to be constrained by Ofwat strengthening protections for non-household customers during Covid-19 and the presence of price caps.
In April last year, Ofwat committed to provide additional regulatory protection if bad debt costs across the market exceeded 2% of non-household revenue.
Georgina Mills, Business Retail Market Director at Ofwat said: “These decisions aim to protect the interests of non-household customers in the short and longer term, including from the risk of systemic Retailer failure as the business retail market continues to feel the impacts of COVID-19. By implementing market-wide adjustments to price caps, we aim to minimise any additional costs for customers in the shorter term by promoting efficiency and supporting competition.”
There are also three areas where Ofwat has not reached definitive conclusions and is seeking further evidence and views from stakeholders:
- Pooling excess bad debt costs – Ofwat proposes that the recovery of excess bad debt costs is pooled across all non-household customers, via a uniform uplift to price caps.
- Keeping open the option of not pursuing a true up – For example if outturn bad debt costs are not materially higher than the 2% threshold.
- Undertaking the true up – If a 'true up' is required, Ofwat has set out how it expects this to work in practice.
Further consultation on the proposed adjustments to REC price caps can be expected by December.
"While it’s great that regulators are helping the industry deal with bad debt in the wake of the pandemic, raising prices only treats the symptoms. Instead, water companies should head upstream, using customer data to identify and rectify the causes of bad debt, stop it at source and help prevent it from occurring in the first place," she said.
"While recouping costs is a must, water companies shouldn’t just rely on the regulator. Data can help companies segment customers, identify and assist customers that are struggling financially, avoiding penalising the entire customer in tackling the cause of the issue."
United Utilities picks up pipeline award
A race-against-time plumbing job to connect four huge water pipes into the large Haweswater Aqueduct in Cumbria saw United Utilities awarded Utility Project of the Year by Pipeline Industries Guild.
The Hallbank project, near Kendal, was completed within a tight eight-day deadline, in a storm and during the second COVID lockdown last November – and with three hours to spare. Principal construction manager John Dawson said the project helped boost the resilience of water supplies across the North West.
“I think what made us stand out was the scale, the use of future technology and the fact that we were really just one team, working collaboratively for a common goal," he said.
Camus Energy secures $16m funding
Camus Energy, which provides advanced grid management technology, has secured $16 million in a Series A round, led by Park West Asset Management and joined by Congruent Ventures, Wave Capital and other investors, including an investor-owned utility. Camus will leverage the operating capital to expand its grid management software platform to meet growing demand from utilities across North America.
As local utilities look to save money and increase their use of clean energy by tapping into low-cost and low-carbon local resources, Camus' grid management platform provides connectivity between the utility's operations team, its grid-connected equipment and customer devices.