Fears of deeper disruption to global oil and natural gas supply are growing as the US and Israel continue to strike Iran, and the Islamic Republic retaliates with missiles and drones across the Middle East. Prices of both commodities have jumped, and a sustained increase could trigger a surge in inflation.
Some oil and gas production has already been interrupted as major energy infrastructure is caught in the cross-hairs of the conflict. QatarEnergy halted activity at the world’s largest liquefied natural gas export facility after it was targeted in an Iranian drone attack. More significantly, tanker traffic through the Strait of Hormuz — a narrow waterway that handles around a quarter of global seaborne oil trade and a fifth of LNG supply — has come to a near standstill.
What’s at stake for the oil market?
Expectations in the global oil market have shifted from a glut of barrels to concerns about their availability. The Strait of Hormuz is a chokepoint for the bulk of oil exports from states around the Persian Gulf. Almost 90% of the crude and condensate transported through the waterway last year went to Asia.
A senior adviser to the commander-in-chief of Iran’s Islamic Revolutionary Guard Corps told state television that Iranian forces “won’t allow a single drop of oil to leave the region.” Iran has targeted tankers, and while insurance to cover vessels can be found, shipowners and their crews deem the risk of passage through the strait to be too great.
Saudi Arabia and the United Arab Emirates have some ability to reroute their crude via pipelines that avoid Hormuz. Iraq also has a conduit that runs from its semi-autonomous Kurdistan region to the port of Ceyhan in Turkey. But as energy infrastructure across the Gulf is caught up in conflict, Iraq has suspended exports via this route as a precautionary measure, according to people with direct knowledge of the situation. Kuwait, Qatar and Bahrain have no other option but to ship their oil through the Strait of Hormuz.
Oil prices could rise to “well over” $100 a barrel if tanker flows through the waterway aren’t restored quickly, analysts at Wood Mackenzie estimate. The last time Brent crude, the international benchmark, reached those levels was in the wake of Russia’s full-scale invasion of Ukraine in 2022. Brent traded around $87 on March 6.
A prolonged pause in Hormuz transits could result in major oil producers in the region hitting the limits of what they can store in onshore tanks and vessels at sea, according to analysts at JPMorgan Chase & Co. That constraint is already being felt in Iraq. OPEC’s second-biggest producer has begun halting operations at its largest oil fields as storage tanks fill up, people familiar with the operations said.
Amid concerns that the Hormuz logjam could lead to an energy crisis, President Donald Trump said that the US will provide insurance guarantees to vessels traveling through the Gulf and, “if necessary,” the US navy will escort tankers. But the details of his plans are sparse, and traders and analysts still expect it would take weeks for flows to resume significantly.
In the meantime, Asian oil buyers have turned to American barrels, helping push US crude export freight costs to record levels. Indian refiners are pivoting back toward Russian oil. They’d previously curbed their purchases from Russia under pressure from the US, but the Trump administration has temporarily eased sanctions on Russian crude already at sea so that India can buy these cargoes.
Are there impacts for oil beyond crude?
The supply of refined petroleum products is also under threat. Operations were suspended at Saudi Arabia’s largest oil refinery, Aramco’s Ras Tanura plant, following an Iranian drone strike in the area.
Prices of diesel, gasoline, jet fuel and naphtha — used to make plastics and road fuel — have all increased. Higher prices at the pump could add to domestic pressures for Trump and the Republican Party, as affordability is set to be a key issue in the US midterm elections later this year. Gasoline prices are one of the most visible signs of inflation.
Countries in Asia are moving to protect their domestic fuel supply. China has told its largest oil refiners to suspend exports of diesel and gasoline, according to people familiar with the matter. Japanese refiners have asked their government to release crude from the nation’s strategic petroleum reserves, people with knowledge of the matter said.
How is the Iran conflict affecting the gas market?
The market is at risk of its biggest shock since Russia’s full-scale invasion of Ukraine upended global gas trade and sent Europe rushing to find alternative sources. Gas futures in Europe nearly doubled in the days after the Iran conflict began, hitting their highest levels since 2023.
The Middle East is a significant supplier of LNG due to Qatar, which was the world’s second-largest producer last year after the US. The Ras Laffan plant that QatarEnergy temporarily shut down — the first complete halt in nearly three decades of operation — accounts for around a fifth of global supply.
Most of the LNG exported from the Middle East is purchased by countries in Asia. If those buyers are unable to source cargoes from the Middle East — whether it’s due to shipping disruptions or production outages — it will increase competition for LNG produced elsewhere and push up prices worldwide.
That would be bad news for Europe. While the continent is nearing the end of winter and so has less need for fuel for heating, it’s exiting the season with unusually low gas inventories. Europe therefore needs to import large volumes of LNG to replenish its gas storage — a task that will be more expensive if there’s greater competition from Asia.
Egypt is also on the hunt for more LNG after Israel, from whom it receives pipeline supply, temporarily shuttered some gas fields as a precaution against Iranian attacks. Turkey’s demand for LNG could increase as well, in the event that pipeline gas exports from Iran are interrupted.
US LNG producers could benefit from the disruption in the Middle East, but the gains will likely be limited as their export terminals are already operating near full capacity. New LNG facilities set to start this year can only partially replace Qatari gas, so some consumers may have to cut their usage or find substitutes — if they can.
How important is Iran to global energy markets?
Oil exports remain a central pillar of Iran’s economy, despite years of the country trying to diversify its growth drivers. But Iran’s influence in the global oil market has waned due to prolonged international sanctions, limited foreign investment and aging infrastructure. While it’s the fourth-largest producer in OPEC, it only churns out around 3 million barrels of crude a day, equivalent to 3% of the world’s output.
Around 90% of the country’s oil exports go to China, largely to independent refiners, who are willing to buy the sanctioned crude at a steep discount. Other countries that have continued to purchase Iranian cargoes include Syria.
What are Iran’s key energy assets?
Iran’s oil export operations are highly vulnerable to attack as they’re concentrated at the Kharg Island terminal in the northern Persian Gulf. In the weeks before the US and Israeli strikes began, Iran increased loadings of oil tankers at this facility, likely in an attempt to get as much crude on the water and out of harm’s way from a potential attack.
The country’s largest oil deposits are the Ahvaz, Marun and West Karun oil fields, all of which are located in Khuzestan province at the northern end of the Persian Gulf, bordering Iraq. Iran’s main refinery, Abadan, is in the same region and can process more than 500,000 barrels of oil a day. Other key plants include the Bandar Abbas and Persian Gulf Star refineries, which are closer to the Strait of Hormuz, and a refinery in the country’s capital, Tehran.
Iran’s main natural gas fields are along the south of its Persian Gulf coast. Facilities at Assaluyeh and Bandar Abbas process, transport and ship gas and condensate for domestic use in power generation, heating, petrochemical production and other industries.
Written by: Paul Burkhardt, Julian Lee, Elena Mazneva, and Anthony Di Paola @Bloomberg
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