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Middle East Escalation, Tight Gas Supplies Support Energy Prices, RBC Says

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A renewed escalation of conflict in the Middle East and tightening European gas supplies could keep energy prices elevated, while signs of a Chinese oil-demand recovery point to a more resilient global market, RBC Capital Markets analysts said in a Thursday note.

Fighting between Houthi forces and Saudi-backed forces has intensified over the past week, with reports that the Houthis have seized the Red Sea port city of Mokha. The development threatens shipping through the Bab el-Mandeb Strait and could give the Houthis greater ability to disrupt traffic along one of the world's key energy corridors, RBC said.

The escalation reinforces RBC's bullish fourth-quarter oil outlook of $121.99 a barrel for Brent and $118.49 for West Texas Intermediate. Saudi oil exports have fallen below 2 million barrels per day in recent weeks, while attacks around the Red Sea have forced more shipments onto longer routes through the Suez Canal, adding logistical constraints.

A renewed full-scale Saudi-Houthi conflict could trigger RBC's high-price oil scenario, which assumes a broader regional conflict, the analysts said.

Meanwhile, Chinese refinery runs have climbed above 90% of pre-war levels, up about 18% from early-July lows, while August crude imports rose 19% from June's low. Higher refinery runs and easing product-market constraints have also helped restore positive domestic refining margins. RBC said the recovery may be uneven but expects Chinese oil demand to prove more resilient after the conflict than some investors anticipate.

European natural gas markets face another source of upward pressure. EU storage levels are about 67%, versus nearly 80% a year ago, while German inventories are at 54.8%. RBC expects Dutch TTF gas prices to remain well supported through winter, particularly if colder weather hits Europe and Asia.

The analysts said a resurgence of Russian gas flows through Nord Stream remains unlikely despite renewed speculation, citing political and practical obstacles. At the same time, rising European wind and solar capacity is reducing gas demand during shoulder seasons, although RBC said that structural shift will not prevent potentially sharp winter price spikes if cold weather emerges.

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