The mega announcement by the IEA of the release of 400m barrels from its reserve did not have the expected bearish impact on oil, gas, power and coal. This is a sizable volume but this is equivalent to about 20 days of normal crude oil traffic via Hormuz (20m barrels per day) or 1 month of EU oil consumption. Despite the rhetoric from the US of a potentially “imminent” end of the conflict the situation on the ground is much more complex with regular attacks on the few vessels daring to pass the Strait and that have not been authorised by Iran. Until now the consensus was that Trump would decide when the war is over, proclaiming victory whatever the results might be. But three serious doubts are now emerging.

Firstly, as Anne-Sophie Corbeau pointed out in our Webinar on Tuesday, the issue is not only the Strait of Hormuz, but also the fact that oil and LNG facilities have been partially destroyed in the region (Saudi Arabia, Qatar, Kuwait). Even if Hormuz is fully re-opened tomorrow, it will take weeks if not months to gear up production to normal levels.

Secondly Israel seems to have a much harder line on the conflict and it might want to pursue its effort and inflict more damage even if the US is withdrawing from the conflict.

Lastly and in a worrying scenario, it is not a given that Iran will oblige and free up Hormuz if the US stops their assault. Sensing that the wind is turning, Iran could in fact push its advantage and continue to disrupt global commodity flows, while letting oil cargoes transiting via Hormuz but only for specific destinations such as China. 

Our Base Case scenario remains a 4-6 weeks conflict for now, but we would need to see serious bombing of the South West coast of Iran sooner rather than later.

All the above is bullish coal demand and prices. Let’s not forget that the first strong correlation between oil and coal occurred in 1991 during the first Iraq war. At that time many power plants were still running on diesel and the Iraq war accelerated the transition from diesel to coal-fired power plants.

We anticipate some gas to coal switching worldwide in the coming weeks and months. We do not anticipate gas power plants to be converted to coal due to the crisis. But as highlighted in our Webinar, this reinforces our view that many countries will skip the gas transition to some degree. 

On another note and let’s not forget this, Indonesia daily exports keep falling, despite the recent announcement from the government of a higher production target at 733mt.

Guillaume Perret