Hormuz Disruption Could Send Global LNG Into Disarray

A potential blockade by Iran of shipping transit through the Strait of Hormuz could send the global LNG market into disarray, with particular focus on the interruption of LNG supplies from major exporter Qatar, market sources warn. Buyers in the Asia-Pacific, mainly China and India, would be most affected by any future disruptions, as they are the main customers for the bulk of LNG volumes from the region.

A full-scale Iranian blockade of maritime traffic through the Strait remains a low-probability, worst-case scenario for most market sources polled by Energy Intelligence. But if the ongoing military conflict in the Middle East escalates further and Tehran decides to act, the global LNG market would struggle to offset the loss of volumes exported from the region.

The Strait of Hormuz, located between the Persian Gulf and the Gulf of Oman, is one of the key shipping transit routes in global energy supplies, accounting for about 20% of global LNG exports. The transit route is considered to be a bottleneck affecting LNG shipments from major supplier Qatar and rising LNG exporter, the United Arab Emirates.

The narrow strait became a focus of attention following the most recent escalation in the proxy conflict between Israel and Iran, exacerbated by the Israel-Hamas war, which caused all tanker traffic to be halted through the Red Sea after Yemen’s Houthi group targeted ships around the Bab al-Mandeb strait with missiles and drones. Tit-for-tat attacks between Israel and Iran last month threatened to throw the region into an all-out war, but have since de-escalated back into a proxy conflict between the two powers.

The global LNG market was not majorly affected by the closure of the Red Sea transit route, as global LNG supply has been segmented geographically since 2023, with US LNG cargoes mostly heading to Europe, while Qatari volumes focused on markets in Asia-Pacific.

Bigger Chaos Than Russia-Ukraine War

If maritime traffic through the Strait of Hormuz is blocked by Iran or its proxies, “it would be an even bigger chaos than when Russia stopped sending pipeline gas to Europe," a Singapore-based LNG trader says.

"[It would] obviously impact the supply demand balance in the industry and other LNG sources should see quite a big challenge to cover such huge loss," an LNG trader at a Japanese trading house says.

"This is one of the worst stress tests one can apply to the LNG markets," according to Felix Booth, head of LNG at energy and shipping analytics firm Vortexa. While Asian buyers would be most exposed by the potential blockade, other global buyers would feel its implications, particularly in Europe, which relies heavily on spot LNG procurement, Booth adds.

"To me this is a very, very low probability event, but with massive price implications," a Spain-based LNG trade analyst says.

Asia Most Impacted

Asia would most likely face serious difficulties to find sufficient replacement volumes if LNG cargoes from Qatar and the UAE would be unable to travel through the Strait of Hormuz, market sources say. Asian buyers imported close to 70 million tons from the two countries in 2023.

The two countries exported a total of 33.67 million tons of LNG so far this year, with 28.6 million tons heading to Asia and 4.9 million tons to Europe, data from commodity analytics firm Kpler shows.

China was the main importer from these two countries in 2023, taking in 17.58 million tons, Kpler data shows. However, Chinese market sources are not yet concerned about the possible blockade. A source at Zhejiang Energy says the company is not concerned about the closure, with the impending threat of a potential blockade of the Strait being the talk of the market for a long time.

A source at state-owned PetroChina says that if the Strait of Hormuz is closed, the global LNG market will be indeed severely tightened. However, the source adds that "temporary domestic production growth can be adopted, and more imports of pipeline gas can be coordinated" in order to offset the lost LNG volumes from the Persian Gulf.

Meanwhile, Japan is expected to see limited quantitative impact if the Strait of Hormuz is closed, given that only around 4%-5% of its total LNG imports come from Qatar, Japan Gas Association Chairman Takashi Uchida said last month.

While the volume impact is relatively marginal, the price impact from the blockage could be substantial, as it would likely push up crude oil prices significantly, which would in turn affect the mostly oil-indexed prices for term LNG volumes coming into Japan, Uchida warned.

"Saudi Arabia's crude oil goes through the Strait of Hormuz, which means the blockade could lead to a significant increase in crude oil prices," he said. "Since LNG prices are linked to crude oil in a large number of long-term contracts, LNG prices could rise in tandem with crude oil prices."

EU Storage Refill In Trouble

While Europe is less dependent on Qatari and UAE LNG volumes, a tighter global LNG supply pool would make it more difficult and expensive for the region to fill its natural gas inventories ahead of the high-demand winter season.

Europe would potentially be able to replace at least a part of those volumes from other sources in the Atlantic Basin, although it could possibly mean more Russian LNG coming to the continent.

The combined weekly LNG exports of Qatar and the UAE averaged 1.6 million tons since the beginning of 2023, Kpler data shows. This is equivalent to the combined weekly LNG imports of Spain, France, Belgium, Netherlands, Germany and Italy, the Spain-based LNG trade analyst says, which would have a negative impact on EU gas storages.

Europe received around 15 million tons of LNG from Qatar and the UAE last year.

Possible Interventions

Military interventions from China and the US to protect commercial shipping in the region could potentially ensure the continued transit of vessels through the Strait of Hormuz, market sources say.

"The risk on trade routes, including the Strait of Hormuz, is higher now than it was before," Tom Harley, managing director at consultancy firm Dragoman, tells Energy Intelligence. But the mitigating factor is China's involvement in the region, which is having a “balancing impact” as Beijing has a strong interest in keeping trade routes open.

Chinese LNG buyers are not worried about a potential blockade of the Strait of Hormuz as the country's navy would take measures if Iran would try to block traffic via the strait, the PetroChina LNG trader says. The Singapore-based LNG trader believes that the US, rather than China, would most likely intervene if a blockade is imposed.

Qatar, UAE Combined LNG Exports in 2023