Straitjacket
OK, you got me. This is interesting enough to tempt me out of semi-retirement, and much of the mainstream coverage has been – to use the Merriam-Webster word of the year 2025 – slop.
For a change, I’ll steer clear of the strait politics, and focus on energy markets. We start, of course, with the restrictions around the Strait of Hormuz – ironically, named for the supreme god of Zoroastrians. Interesting as that rabbit-hole is, let’s move on.
LNG
Starting with LNG, where y’all have read that 20% of the global LNG capacity is trapped. So far, so good. But so what?
First, let’s look East. As always happens with an energy crisis, the poorest suffer first, which in this case means the likes of Bangladesh, Pakistan and smaller South / Southeast Asian economies. Just as happened in 2022 when Europe sought to replace Nord Stream, they will go without and no-one will report on the consequences. Again.
The larger Asian economics – think Japan, South Korea, India – will be fine. Coal producers will be the winner here who enjoy higher demand and prices, and if they need LNG, they can afford it (certainly Japan / Korea, maybe less so India). China is likely a special case who will enjoy lower cost Russian supply – lucky for them this is happening in Summer so the Northern sea route is open.
Looking West is more complicated. Europe is rolling into this with gas storage at 5-year lows, and a backwardated LNG curve (LNG delivered later in the year is lower cost than LNG delivered now) means it appears that refilling later will be cheaper than starting to refill now.
This delay means they are betting on a short conflict and a quick recovery… but LNG facilities aren’t switches. If DJT and the IRGC kiss and make up tomorrow (urgh… now I can’t get that image out of my head… now neither can you…), it’s likely still a month or so for the facilities to restart, train by train. LNG ships that have been bobbing around and warming up will need to be (gently) cooled down, which takes a day or so each, before loading can start.
Beyond that, it will take time for the generally well-optimised global delivery system to get all of the vectors, trade routes and ships back in the right place. This means operating underutilised for probably another month or two.
Rolling it all together, a big hole is being punched into the 2026 LNG supply picture. It won’t take much for Europe to struggle to refill storage; if this is followed by a remotely cool winter, they may be in trouble. Remember that, according to The Economist, Europe suffered 68,000 excess deaths in the winter of 22/23, largely attributable to high energy costs. If you want one metric to track, follow European gas storage.
Who wins out of this? The Russians, obviously. A clean start up at Golden Pass would help its owners – ironically enough, 75% QatarEnergy. And, of course, VentureGlobal will continue doing VentureGlobal things.
Losers? Qatar most clearly – just how much remains to be seen. It’s possible that we see delays in their new project development, changing the supply/demand balance late this decade. Poorer nations in Asia. And Europe is on a knife-edge.
This progresses against a backdrop where the largest gas field in Europe, Groningen, remains closed due to the risk of earthquakes covering about 30,000 people. That’s a risk to that number of people who may be relocated; please now compare it to the number of excess deaths in 22/23.
Against a backdrop where the development of indigenous supply is blocked by policy – such as the Gainsborough Trough, a British 16 TCF gas field (trust me, that’s big).
Where even the European Union now admits that moving away from Nuclear was a mistake. Where Germany has turned back to lignite.
Accuse me of 20/20 hindsight if you wish, but we’ve only been talking about the potential closure of the strait for almost 50 years…
Oil
So there has been much vaunting of the supply curtailment, but I’m macro-less concerned, and micro-fascinated to see what happens next.
Staring macro… LNG is perishable – it boils off over time – so storing is hard. Oil, on the other hand, can be stored indefinitely which means that things like strategic reserves are possible. Stockpiles in any supply chain deliver resilience to supply shocks. There’s also a decent amount of price elasticity (at higher gas / petrol prices, people fly and drive less).
The likes of China – a massive importer – have been hoovering up crude at the low prices of the last year, so they have plenty in reserve. Russian crude is forgiven and back in vogue, and Venezuelan crude is once again hitting the gulf coast refineries specifically designed to process it.
I have been somewhat critical of the IEA over the years, and that isn’t about to change. Coordinating a large release in the way that they did, confirmed concern and sent an unnecessary shock through the market… an alternative would have been to announce a daily rate of release to rebalance markets.
Once tensions ease, I expect this to bounce back quickly… however.
Micro is where this gets interesting, which means countries and refined products.
US shale producers (theoretically able to bring on supply in the shortest timeframe) aren’t drilling – they are hedging and waiting to see how this plays out.
Warren Buffett famously wrote “Only when the tide goes out do you discover who’s been swimming naked”. Well, countries who decided that they no longer needed refineries will be reaching for the nearest fig leaf – watch Australia and New Zealand, as an example. No refining capacity means there is no point in storing crude, you have to store refined products instead…
… but the spreads between refined product pricing is blowing out, so refiners are scrambling to make the right things – it’s common to see reserves of things like gasoline and jet fuel, not so much marine fuel oil which has seen crazy price escalation. Coming soon, a supply chain disruption to a port near you, especially if you are reliant on imported gasoline.
Where next?
There’s no Houdini-esque escape method to this strait (of Hormuz) jacket[1], and clearly swift resolution is lower impact than a lengthy affair. However, we can reasonable foresee:
- A significant risk for winter in Europe: this we should monitor closely.
- A big party in Moscow.
- Debates around the importance of refining capacity as a matter of national security. These will likely fade and fail, resulting merely in increased stockpiling of products (adding to demand, holding prices up for longer).
- The right will call for the development of national resources.
- The left will shriek that this is evidence of hydrocarbons not being that reliable after all; solar and batteries fix everything.
- Handwringing at the so-called super-profits of oil and gas companies and the associated call for windfall taxes - wilfully ignorant that it is the investments of these companies, carrying the risk of such events, that underpin the quality of life of most of the developed world.
It’s going to be lively.
[1] Don’t tell that to the Economist who recently published a podcast titled “how to manage an oil shock”. It offered no such guidance.