European Energy Supplies Under Threat From Mideast War

European energy markets are more vulnerable to Middle East tensions than the US due to its import dependence and geopolitical exposure. Further military escalation could lead to price spikes and supply disruptions as winter approaches. 

Oil prices climbed for the third straight session on Thursday following Iran's missile attacks on Israel on Tuesday. December Brent crude futures rose 5% to $77.62 a barrel on ICE Europe, the highest since August 30. 

President Joe Biden said on Thursday that the US is discussing with Israel the possibility of Israeli strikes on Iran's oil infrastructure. This might trigger further upside for prices, while cutting European energy supplies. 

European Union (EU) petroleum oil imports from Saudi Arabia, Libya and Iraq accounted for 23% of its second-quarter imports.

Iranian-Backed Militias Threaten European Energy

European energy supplies would be impacted if Iranian-backed militias step their attacks on energy infrastructure.

The Shiite Houthis in Yemen have carried out nearly 100 attacks on ships crossing the Red Sea since November. They say they are acting in solidarity with Palestinians in Israel’s year-long war in Gaza.

A senior official from a coalition of mostly Shiite Muslim paramilitary groups threatened to halt Mideast energy supplies. European Capital Insights didn't independently verify the threats.

Iran's "seriously destabilizing actions" throughout the Middle East "must stop," G7 Leaders said in an October 3 statement. 

They pointed to Iran's terrorist proxies and armed groups, including the Houthis, Hezbollah, and Hamas, and Iran-aligned militia groups in Iraq.

Dimon, Lagarde Issue Geopolitical Warnings

JPMorgan's JPM CEO Jamie Dimon warned that history was repeating itself, even before the bout of Middle East violence.

"Geopolitics are getting worse," Dimon said at the Atlantic Festival in Washington, D.C. on September 20.  

“The most important thing that dwarfs all other things" since 1945 is "what’s going on in Israel [and] in the Middle East" and Ukraine, Dimon said. He made his comments at Georgetown University on September 17.

European Central Bank (ECB) President Christine Lagarde issued a similar warning on September 20, saying the "uncertainty ahead is profound." 

Global pressures resemble those that “took place a century ago,” Lagarde said. That resulted in "economic nationalism” and a collapse in global trade, she said. 

Spain's Role In European Energy Supplies

Spain could play a strategic role in moving Europe energy if Middle Eastern routes are disrupted.

Spain does not rely on Middle Eastern oil supplies, providing a risk buffer to any disruptions in European energy supplies. Its oil imports are mainly from the U.S. (14.1%), Mexico (11.4%), and Brazil (10.8%).

Source: Statista, Spain Imports by Country, 2023

Spain can also distribute abroad through its 11 oil port terminals. It has the largest civil pipeline network in Western Europe.

As a net exporter of refined oil products, it has a capacity of 1.59 million barrels per day. 

The country also has a total storage capacity of approximately 184 million barrels through 138 sites. This includes strategic reserves managed by CORES, the Corporation of Strategic Reserves of Oil Products.

As the first point of contact for oil shipments rerouted around the Cape of Good Hope, Spain ensures 90% inland oil transportation through its pipelines. For context, Germany ensures only 11%. 

Source: IEA, Spain oil security policy, 2022

Repsol Could Benefit from European Energy Risks

Spain's Repsol REPYF stands out as a beneficiary amid potential disruptions in European energy supplies. 

It has limited exposure to the region and substantial investments in the U.S. and Brazil. 

Source: Repsol 2024 interim report, first half, upstream investments

The company operates five major refineries in Spain with a total production capacity of 1.013 million barrels per day. This is 64% of Spain's entire capacity as of the first half 2024. 

Repsol reported a net income of €1.626 billion for the same period, up 15% from the year prior. Additionally, it invested more in growth and diversifying into low-carbon generation and renewable energy.

The energy corporation increased dividends to €0.5 per share in July, a 30% increase compared to 2023. It also maintained a strong liquidity of €9.67 billion.

At an extremely low P/E ratio of 4.4 multiple in an industry averaging 11, Repsol stock appears undervalued. Analyst price targets range from €15 to €20.50, averaging a 46% upside to €17.72 per share as of October 4.

Disclaimer:

Any opinions expressed in this article are not to be considered investment advice and are solely those of the authors. European Capital Insights is not responsible for any financial decisions made based on the contents of this article. Readers may use this article for information and educational purposes only. 

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