The escalating conflict in the Middle East is delaying LNG shipments via the Strait of Hormuz from key exporters in the region, putting severe upward pressure on spot LNG prices in Asia and the European natural gas market.
The key Strait of Hormuz, where a fifth of global oil and LNG flows pass, is not formally closed. However, major shipping operators and oil and gas companies, and traders have effectively halted shipments through the narrow lane between Iran and Oman.
At least a dozen empty tankers on the eastern side of the Strait of Hormuz have diverted in recent hours, according to vessel-tracking data compiled by Bloomberg.
The delay to LNG shipments from Qatar and the United Arab Emirates (UAE) would see natural gas prices spiking in Europe and Asia.
A month-long halt to LNG exports via the Strait of Hormuz would push Asia’s spot LNG price to jump by 130% to $25 per million British thermal units (MMBtu), Goldman Sachs analysts say.
Qatar, the world’s second-largest LNG exporter after the United States, accounts for about 20% of global supply, all transiting the Strait, according to Kpler data.
Following the escalation of the conflict in the Middle East, energy analysts and investment banks expect oil prices to surge this week to $90 with chances of hitting $100 per barrel if disruptions to traffic in the crucial Strait of Hormuz persist.
Early on Monday in Asian trade, oil prices had already spiked by 10% to above $80 per barrel Brent. Seeing the scale of the conflict and the already disrupted traffic through the Strait of Hormuz, analysts expect further spikes at least this week.
Citigroup expects Brent Crude to trade in the $80 to $90 per barrel range over at least the coming week in the bank’s base case.
“Our baseline view is that the Iranian leadership changes, or that the regime changes sufficiently as to stop the war within 1-2 weeks, or the US decides to de-escalate having seen a change in leadership and set back Iran’s missiles and nuclear program over the same time frame,” analysts at Citigroup wrote in a note carried by Bloomberg.
Goldman Sachs sees an $18 a barrel real-time risk premium in oil prices. However, if only 50% of flows through the Strait of Hormuz are halted for a month, the war risk premium to prices would moderate to $4 per barrel, according to Goldman.
Wood Mackenzie sees disruption in flows to push oil to above $100 per barrel.
So any effect of the new war on inflation will probably be transitory.
So far, so reassuring. Yet there are, as I see it, at least two reasons — in addition to the threat to shipping — to be moreworried about a war in the Middle East than we would have been decades ago.
First is financial fragility. In 1979 the U.S. financial system was still highly regulated, so that there was little room for serious bank runs and other disruptions. Today many observers have been warning about potential risks to financial stability, most urgently from private credit. Could the Iran war trigger a broader financial crisis? I don’t know, but it doesn’t seem alarmist to be worried.
Also, might the war burst a market bubble? The next to last line in the table shows the price-earnings ratio for the S&P 500, which was low in 1978 but is very high now. Will those high valuations be sustainable if the fallout from the war causes significant economic damage?
Finally, one point I haven’t seen many observers emphasize is that the modern Middle East now plays an important role in the world economy that goes beyond its status as a major source of oil. Dubai in particular is an important node in the global financial system, as well as playing host to many extremely rich people who thought they had found a safe haven. One indicator of that changing status is the transformation of Dubai International Airport into one of the world’s most important travel hubs.
To the extent that the war disrupts this new role for the region, that will be another risk to the world economy.
I don’t want to engage in doomsaying. But I do worry that people are too complacent about the economic risks this war creates.
Reuters reported:
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Saudi Aramco shuts Ras Tanura refinery after drone strike; Kuwait refinery hit by debris
The Ras Tanura complex,includes one of the Middle East’s largest refineries with a capacity of 550,000 barrels per day and also serves as a key export terminal for Saudi crude
Aramco shuts its Ras Tanura refinery following a drone strike. Image: @NedretErsanel
Saudi Arabia’s state oil giant Aramco has shut its Ras Tanura refinery as a precautionary measure after it was hit by a drone, an industry source told Reuters on Monday, adding that the situation was under control.
The Ras Tanura complex, located on Saudi Arabia’s Gulf coast, includes one of the Middle East’s largest refineries with a capacity of 550,000 barrels per day and also serves as a key export terminal for Saudi crude.
Aramco did not immediately respond to an emailed request for comment.
Russian President Vladimir Putin may have lost another close ally after the death of Iranian Supreme Leader Ayatollah Ali Khamenei, but an oil shock from conflict in Middle East spells potential good news for his war chest.
The U.S.-Israeli war against Iran has closed the Strait of Hormuz, the narrow waterway giving access to the Persian Gulf and one of the world’s key chokepoints for tankers carrying oil and liquefied natural gas. That is firing speculation that global crude prices could spike dramatically, boosting Russian revenues.
“$100+ oil per barrel soon,” Kremlin envoy Kirill Dmitriev gloated on X Saturday evening. The current price of Brent crude is about $73 a barrel, while West Texas Intermediate trades at about $67.
In addition to the closure of the Strait of Hormuz, U.S. President Donald Trump has taken control of Venezuela’s oil. This mean major importers such as India and China could have to look to Russia to provide even more crude supplies, helping Moscow’s coffers as it enters its fifth year of war with Ukraine.
“For our budget [the attack on Iran] is a big plus,” prominent Kremlin propagandist Vladimir Solovyov told his viewers.
“If Trump strikes Iranian oil fields, then, as unfortunate as it sounds, we [Russia] would become one of the few remaining [oil] producing countries.”
“So we are gaining a trump card in this complex game,” he concluded.
On Telegram, one military blogger was even more blunt in rejoicing.
“Rise up, oil, from your knees!” read a post on the pro-Kremlin Telegram channel MIG Rossii, which has more than five hundred thousand users, punctuated with a prayer-hands emoji.
At the highest level, the Russian authorities have expressed outrage over the attack against the the Islamic Republic.
Putin on Sunday expressed his condolences over the death of Khamenei, denouncing it as “murder … committed in cynical violation of all norms of human morality and international law.”
Russia’s foreign ministry in a statement reiterated its call to end the fighting, warning that the closure of the Strait of Hormuz could result in “significant disbalance on the global oil and gas markets.”
Retired, living in the Scottish Borders after living most of my life in cities in England. I can now indulge my interest in all aspects of living close to nature in a wild landscape. I live on what was once the Iapetus Ocean which took millions of years to travel from the Southern Hemisphere to here in the Northern Hemisphere. That set me thinking and questioning and seeking answers.
In 1998 I co-wrote Millennium Countdown (US)/ A Business Guide to the Year 2000 (UK) see https://www.abebooks.co.uk/products/isbn/9780749427917
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