As the war in the Middle East drags on, the crisis in the energy market is becoming more serious by the day. Prices for everything from gas and oil to jet fuel and plastic are rising rapidly.
This crisis will worsen dramatically over the next week or two.
Energy shipments stopped on February 28, when the war began and Iran effectively closed the Strait of Hormuz. However, in the last days before the conflict began, many ships went to sea. The last ships are expected to arrive at ports in Japan and South Korea within the next eight to 10 days.
Nothing comes after that.
“There’s this huge air pocket. At this stage, we think there’s probably about 500 million barrels of what would normally be coming out of Hormuz that is not coming out right now,” said Rory Johnston, founder of Commodity Context.
Watch | Wars in the Middle East are disrupting global supply chains.
In the oil industry, there is a difference between what people call paper oil and physical oil.
Currently, there is a shortage of paper oil, which is a contracted product. This represents the oil that can be transported, rather than the actual barrels that travel by ship.
But as soon as the actual final shipment of oil leaving the Straits reaches its destination, the shortfall moves from the paper world to the physical world.
If that happens, there will be a shortage of tangible oil to actually get things moving.
Governments around the world have agreed to release 400 million barrels of oil from strategic stockpiles. The US has lifted some sanctions on Iranian and Russian refineries to deal with the supply shock.
Japan’s International Vice-Minister Takehiko Matsuo said it was still not enough to resolve supply issues.
He told Reuters that Japan had about three weeks’ worth of gas stored.
Meanwhile, natural gas futures prices – contracts that allow traders to reflect gas prices weeks and months into the future – have soared more than oil since the war began. Asian benchmark JKM futures are up 90%.
“The amount of gas that cannot pass through the Strait of Hormuz is huge – about 120 billion cubic meters,” said Bridget Payne, head of energy forecasting at global economic research firm Oxford Economics.
For comparison, when Russia launched a full-scale invasion of Ukraine in 2022, about 80 billion cubic meters of gas exports were lost, and this disruption caused gas prices to rise by about 250 percent year-on-year in the second quarter of 2022.
Mr Payne said it would be felt more strongly in some countries than others.
“This will be of particular concern in economies like Taiwan, which relies on natural gas to power its industrial sector, and Pakistan, which relies almost entirely on Qatar for its LNG imports,” he said in a note to clients.
Pakistan is already facing shortages due to its proximity to the region, with the last ships arriving in the past week or so. The country requires civil servants to work four days a week. Schools were closed for two weeks. It’s all an effort to save energy.
This issue is further complicated by two important factors. The first is that no one knows when normal shipping will resume in the Strait of Hormuz, even remotely.
The other thing is that once that happens, it takes a long time to replenish the air bubbles in the system.
“Oil can only move as fast as a tanker can,” Johnston said.
And the tanker moves slowly. Even if Hormuz became navigable tomorrow, it would be weeks before those ships started showing up in ports around the world.
Oxford Economics expects the Strait of Hormuz to remain impassable until May. It expects “heightened geopolitical tensions” to disrupt trade until the end of September.
This means that the bubble will be orders of magnitude larger than today’s bubbles, and that actual energy product shortages in some countries will last for months rather than days or weeks.
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Meanwhile, oil industry executives and policymakers are meeting in Houston for CERAWeek, an annual conference that has been dubbed the energy sector’s version of Davos.
Oil analysts like Karim Fawaz, director of energy advisory at S&P Global, are reporting what is now being described as “irrational optimism” among industry insiders.
“The alternatives are so daunting to consider and the consequences so severe that many are choosing to take an optimistic view without a solid basis,” he wrote on X on Wednesday.
Johnston has heard the same thing.
“A lot of the comments from management are basically like, this is a disaster, but it’s so bad that it won’t last long, right?” he said.
The problem is that the turmoil has already lasted longer than most expected, and there is little clear path to ending the war and quickly restoring oil flows.
