Oil prices soared on Monday as traffic through the Strait of Hormuz came to a near halt. However, the longer-term consequences of the strait's closure may prove more severe for the liquefied natural gas (LNG) market due to the challenges associated with transporting LNG compared to crude oil and the concentration of LNG production.
Approximately 20% of global LNG is transported through the Strait, predominantly exported from Qatar. Following a halt in output by Qatar in response to an Iranian drone attack, global gas prices have surged. European natural gas experienced a 63% rise last week, marking its largest percentage increase since March 2022 after Russia invaded Ukraine. Asian prices have escalated further, reaching $23.40/MMBtu as of Monday morning, driven by the predominance of Qatari LNG exports to Asia. Facing cargo shortages, some LNG vessels initially destined for Europe have reversed course to supply the Asian market instead.
While Saudi Arabia and the UAE have managed to redirect some crude oil via pipelines, such infrastructure is unavailable for gas, which necessitates shipment over long distances. A majority of Middle Eastern oil-producing states lack the centralized gas production facilities, making the market susceptible should disruptions occur, emphasized Alex Munton, director of global gas and LNG research at Rapidan Energy.
The pressing concern, according to Munton, lies in the complexities involved in resuming Qatar's LNG production at Ras Laffan once traffic in the Strait normalizes. Restarting LNG operations is inherently more challenging than oil production due to the intricate cooling processes involved. Restarting operations would take much longer to execute.
Rapidan Energy forecasts that regional LNG exports will not recommence until safety for ship passage through the Strait is comprehensively assured. This is compounded by high insurance costs, with an LNG tanker valued at $250 million. The complexity of LNG production precludes rapid operation scaling in response to perceived security variations, necessitating weeks to fully resume operations — a scenario exacerbated by the fact that the plant has never before gone offline entirely.
Munto affirmed to CNBC, “I don't think in the first few days of this conflict — we're only a week in — 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.”