There’s another energy market that may get hit harder than oil by Strait of Hormuz closure

Oil prices jumped Monday with traffic in the Strait of Hormuz at a near standstill, but the longer-term implications of the Strait’s closure may be more extreme for the liquefied natural gas market. That’s in part because it’s more difficult to move than crude oil and LNG production is more concentrated.

Roughly 20% of global LNG flows through the Strait — the majority of which is exported from Qatar — and global gas prices are surging after the country last week halted output following an Iranian drone attack. 

European natural gas rose 63% last week for its largest percentage gain since March 2022, following Russia’s invasion of Ukraine. Prices in Asia are even higher — trading at $23.40/mmbtu Monday morning — given the majority of Qatari LNG flows to Asia. Asian nations are trying to make up the lost cargoes, and as the spread between European and Asian gas widens, some LNG vessels originally bound for Europe are now U-turning and heading to Asia instead.

Part of Saudi Arabia’s and UAE’s crude has been re-routed through pipelines, but the same infrastructure doesn’t exist for gas. Put another way, a ship is required to transport it long distances.

And while many states in the Middle East produce oil, gas production is concentrated at one industrial complex in Qatar, making the market much more vulnerable going forward, noted Alex Munton, director of global gas and LNG research at Rapidan Energy.

The real risk, Munton said, is how difficult it will be to restart Qatar’s LNG production at Ras Laffan once traffic resumes in the Strait. Given the complexities of cooling gas, which is fundamentally an industrial process, it will take much longer to restart than oil production.

Rapidan predicts that LNG exports from the region won’t begin again until there’s 100% certainty that it is safe for ships to transit the Strait. Insurance is one factor — an LNG tanker can cost $250 million — but the complexity of the process means operations can’t be ramped up and down based on perceived escalations or de-escalations. It will also take weeks, rather than days, to fully restart operations, according to the firm, which added the entire plant has never been taken offline before.

“I don’t think in the first few days of this conflict — we’re only a week in — that there is an appreciation for the length of time that Qatar is going to be offline and the effect it will have on global supply and the global markets,” Munton told CNBC. 

The U.S. is the world’s largest LNG exporter, but production is essentially running at max capacity. And with little additional output available worldwide, demand destruction is what might ultimately balance the market. That could include swapping gas for relatively inexpensive coal, for example.

But Munton said an escalation in hostilities, including additional attacks on Qatar’s LNG infrastructure, could lead to larger long-term ramifications. Rapidan’s view is that Iran’s prior attacks against Ras Laffan were a “warning shot that wasn’t the real deal.”

“It’s a sitting duck,” Munton said of the industrial complex. “If Iran wanted to do major damage to Qatar’s LNG capacity, it could. … There is no way of defending completely against an Iranian attack if Iran was hell bent on damaging the plant.”

“It’s not like one node can take out all Middle East oil production, because there’s just too many fields, there’s too many countries, there’s too many plants and facilities … but with LNG it’s one facility. It’s a gigantic complex, but it’s just one facility.”

QatarEnergy is now delaying an expansion to its gas facilities until 2027, according to Bloomberg.