Oil prices surged on Monday as traffic in the Strait of Hormuz came to a near standstill, but the long-term effects of the Strait’s closure could be more severe for the liquefied natural gas (LNG) market. This is partly due to the higher difficulty in transporting LNG compared to crude oil, along with the concentrated nature of LNG production.
Approximately 20% of the world’s LNG passes through the Strait, with the majority being exported from Qatar. Global gas prices have skyrocketed after Qatar halted output last week following an Iranian drone attack.
European natural gas prices surged 63% last week, marking the largest percentage gain since March 2022 after Russia invaded Ukraine. Prices in Asia are even higher, reaching $23.40/MMBtu as of Monday morning, given that most Qatari LNG is destined for Asia. Asian countries are scrambling to cover the shortfall, leading to LNG vessels originally bound for Europe to change course and head to Asia.
While Saudi Arabia and the UAE have rerouted some crude via pipelines, similar infrastructure for gas does not exist, necessitating the use of ships for long-distance transport.
Alex Munton, director of global gas and LNG research at Rapidan Energy, highlighted the concentrated nature of gas production in the Middle East, with most coming from a single industrial complex in Qatar. This makes the market more susceptible to disruptions.
The key issue, Munton said, is the complexity of restarting Qatar's LNG production at Ras Laffan once the Strait reopens. The cooling of gas is a complicated industrial process, meaning restarting will take longer compared to oil production.
According to Rapidan, LNG exports from the region will not resume until there is complete assurance of safe navigation through the Strait. Insurance and the complexity of operations are major factors, as an LNG tanker can cost $250 million. Restarting full operations could take weeks, not days, and it's unprecedented for the entire plant to go offline.
“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.