Brent Crude Surges Past $110, Boosting Tel Aviv Gas Stocks Amid Geopolitical Tensions

The Tel Aviv Oil and Gas index saw a 1% rise on a day when most other Israeli stock market indices declined. This surge was driven by a nearly 3% jump in Brent crude futures, pushing prices to between $111 and $112 per barrel, the highest level since mid-May. Major Israeli energy companies, including NewMed Energy and Delek Group, benefited from this trend, while the broader TA-35 index fell by nearly 1%.

The market's reaction was triggered by two key reports. U.S. and Israeli military forces were reportedly preparing detailed plans for a potential renewed strike on Iran following the midterm elections. Concurrently, the U.S. State Department advised non-essential personnel and their families to leave Saudi Arabia due to escalating Houthi attacks. These developments led the market to price in a risk of supply disruptions from the Persian Gulf, causing Nasdaq futures to drop by nearly 2%.

While higher oil prices typically translate to higher energy profits, the impact on Israeli gas companies is more complex. Much of the gas from the Leviathan and Tamar fields is sold under long-term contracts. Some of these contracts are linked to formulas that include a floor price, local indices, or partial linkage to Brent crude. This means that increases in oil prices result in a less proportional rise in revenue, often with a time lag of several months. Contracts with Egypt and Jordan show a more significant linkage to Brent, with some prices directly derived as a percentage of the barrel price, potentially increasing export revenues if oil prices remain high.

NewMed Energy, holding a 45% stake in the Leviathan field, is involved in a dispute with Dalia Energy over a canceled gas supply agreement. NewMed and Ratio sent Dalia a notice of cancellation, citing unmet conditions. Dalia disputes this, claiming the agreement is active. While the immediate financial impact is limited as supply was slated to begin in a few years, the dispute could lead to higher prices if NewMed can sell the gas elsewhere. Delek Group, which has broader energy holdings including Ithaca Energy operating in the North Sea, has a more direct exposure to oil prices than NewMed. Its stock has seen a modest increase over the past year.

Geopolitical events have historically caused rapid oil price spikes that can quickly reverse. Factors such as limited escalation or increased production by countries like Saudi Arabia could lead to price drops. However, security incidents near Mediterranean gas rigs pose a unique risk to Israeli gas stocks, potentially causing temporary shutdowns. Higher oil prices also have a broader economic impact, increasing transportation and production costs, fueling inflation, and complicating interest rate decisions for the Bank of Israel. Investors in gas stocks are now closely monitoring export volumes to Egypt, the Dalia dispute, and Brent crude prices, with the full impact on financial reports expected to unfold gradually over several quarters.