The energy crisis has just begun
Every day the war in the Middle East drags on, the crisis in energy markets deepens. The price of everything from gas and oil to jet fuel and plastics is rising rapidly.
This crisis is going to get dramatically worse in the next week or two.
Energy shipments were halted when the war began on February 28 and Iran effectively closed the Strait of Hormuz. But many ships went to sea in those final days before the conflict began. The last of them should reach Japanese and Korean ports in the next 8-10 days.
After that, nothing is coming.
Rory Johnston, founder of Commodity Context, said, “You have this huge air pocket. At this stage, we’re probably looking at about half a billion barrels of volume flowing out of Hormuz that is no longer flowing.”
Look War in the Middle East is impacting global supply chains:
There is a difference between what people in the oil industry call paper oil and physical oil.
Right now there is a shortage of paper oil, which are contracts. It represents the oil that can be shipped as opposed to the actual barrels that travel on a ship.
But as the actual, final shipments of oil through the Strait reach their destinations, the shortage moves from the paper world to the real, physical world.
When that happens there will be a shortage of actual oil to actually power things.
Governments around the world have agreed to release 400 million barrels of oil from strategic reserves. The United States has lifted some sanctions on refiners in Iran and Russia to help deal with the supply shock.
Japan’s vice minister for international affairs, Takehiko Matsuo, has said it is still not enough to fix supply issues.
He told Reuters that Japan has about three weeks’ worth of gas in storage.
Meanwhile, natural gas futures prices – contracts that reflect what traders expect the price of gas to be in the coming weeks and months – have risen even more than oil since the war began. Asian benchmark JKM futures are up 90 percent.
“The amount of gas unable to transit through the Strait of Hormuz is huge: about 120 billion cubic metres,” said Bridget Payne, head of energy forecasting at global economic research firm Oxford Economics.
For comparison, when Russia launched its full-scale invasion of Ukraine in 2022, about 80 billion cubic meters of gas exports were lost – a disruption that sent gas prices up nearly 250 percent year over year in the second quarter of 2022.
Payne said it will be felt more in some countries than others.
“This will be of particular concern in economies such as Taiwan, which rely on natural gas to power their industrial sectors, or Pakistan, which is almost entirely dependent on Qatar for its LNG imports,” he wrote in a note to clients.
Pakistan is already facing material shortage as it is close to the region and its last ships have arrived in the last about a week. The country has implemented a four-day work week for government employees. It closed schools for two weeks. Everyone is trying to save energy.
The problem is complicated by two major factors. First, no one knows when the Strait of Hormuz might see even remotely normal shipments again.
The second thing is that, once that happens, it will take a long time for that air bubble to refill the system.
“Oil only moves at the speed of a tanker,” Johnson said.
And tankers move slowly. Even if Hormuz becomes navigable tomorrow, it will be weeks before those ships appear in ports around the world.
Oxford Economics expects the Strait of Hormuz to remain impassable until May. He expects trade disruptions to continue until the end of September due to “heightened geopolitical tensions.”
This means that the air bubble is much larger than the one we have today and that actual shortages of energy products in selected countries last for months rather than days or weeks.
Look Canada presents energy projects at oil summit:
Meanwhile, oil industry executives and policymakers are meeting in Houston for the annual CERAWeek conference, often described as the energy sector’s version of Davos.
Oil analysts such as Karim Fawaz, director of energy advisory at S&P Global, report what they describe as “irrational optimism” among people in the industry.
“It’s so hard to think of an alternative, with consequences so dire, that many people are choosing optimism even without a solid basis,” he posted on Twitter on Wednesday.
Johnson is hearing the same thing.
“You’re seeing a lot of comments from officials like, this is basically disastrous. But, this is so bad that it’s not going to last, right?” He said.
The problem is that the disruption has already lasted longer than many expected, with few clear paths to ending the war and quickly restoring oil flows.
