Will Iran close the Strait of Hormuz?

This week, LNG prices rose to a 10-week high in Europe in response to the escalating conflict in the Middle East.  

With the shadow of a threat from Iran to close its vital waterway for global LNG shipments, in this episode, we discuss the likelihood of this happening, the political power dynamics at play and the implications for global energy markets.

Richard speaks to Eurasia Group’s Head of Energy and Kpler’s Principal LNG Analyst about the changes in shipping movements that we have seen around the strait in response to Israel and Iran’s attacks, and what this tells us about how the energy markets have so far reacted.

Host: Richard Sverrisson
Contributor: Laurence Walker - Deputy Editor-in-Chief, Montel News

Guests:
Laura Page - Principal LNG Analyst, Kpler
Henning Gloystein - Practice Head of Energy, Climate & Resources, Eurasia Group

Editor: Bled Maliqi
Producer: Sarah Knowles

Transcript

Richard Sverrisson: 0:04

Hello listeners and welcome to Plugged In - the Energy News podcast from Montel, where we bring you the latest news issues and changes happening in the energy sector. Will Iran follow through on its threats to close the strait of Hormuz? A crucial waterway for global LNG trade, A benign threat that was lurked in the background is now creeping its way back on the table as the conflict between Israel, Iran and now likely the US escalates. While we've seen most energy markets respond sharply to the events of the last week, none seem as vulnerable or as sensitive as NNG. Why? I'm going to be speaking to experts from Kpler and Eurasia Group about the impacts of the conflict on LNG. But first I'm joined by our deputy editor-in-Chief Laurence Walker. Welcome back to the podcast, Laurence.

Laurence Walker - Deputy Editor-in-Chief, Montel News: 0:54

Thank you, Richard.

Richard Sverrisson: 0:55

Laurence, we're recording this episode on Thursday morning and you know the situation. Is very, you know, it's very dynamic. The things that happening, things are changing very rapidly. How have the markets responded to the escalating conflict between Israel and Iran this week?

Laurence Walker - Deputy Editor-in-Chief, Montel News: 1:12

Well, yes, I mean, certainly as you say, it's been a very there's, a lot of changes. Every day something new, people are looking to, the markets reacted very bullishly as could be expected. I think as of today, gas prices or at least shrunk month. TTF crisis are still up for around 10% on the week. Yesterday it went over 40 euros per megawatt hour for the first time since April, I think it was. And so the market is obviously concerned. I think at this stage. A lot of it is the sort of the fear factor, the fear of the unknown. People are concerned certainly that there could be some major disruptions to supplier as a result, but also they're as near bets. This is, there is to some extent a relatively low possibility of some of these things actually occurring. But obviously the fact is if something did happen that could be major for the market.

Richard Sverrisson: 1:58

There seems to be, I think the consensus is that there's an unlikely. But still growing a threat that Iran could close the straits of Hormuz. For those listeners who aren't aware, could you explain why this is such an important route for global LNG? So why is this so crucial, this little strait in the Middle East?

Laurence Walker - Deputy Editor-in-Chief, Montel News: 2:18

Yes. This is obviously a significant threat. And it's the major point people are concerned about. The straight of Hormuz it handles around 20% of the world's LNG supply the cargoes from Qatar. And from UAE, if this amount of LNG was suddenly cut outta the market, it would obviously have an enormous bullish impact. People would be struggling for cargoes elsewhere. We've looked into the various, we have stories on this as week as well, but the likes of America, for example, and other providers would not be able to meet that level of supply if it does go the moment, most of the. The bulk of their echo China is probably the one of their biggest customers at the moment. And Europe takes not so much from there. Maybe so four or 5% I think of the LNG that comes outta that. But because LNG is this sort of global pool, if you take something out of it, then whoever doesn't have the car goes will have to look elsewhere for it. If China isn't getting its cargoes, it's gonna look elsewhere, it's gonna look to America, they'll look to other places and will put it in, you know, in competition with Europe. We can see a sort of tug of war for cargoes. Being a global market, it is, this is, this is something which is potentially a big concern. If it happens, that's the point. Yeah,

Richard Sverrisson: 3:26

absolutely. That's, and that's a big if. But thanks very much, Laurence. I know, you, this is a story that's developing and that you and your team are covering. So I'll let you get back to the newsroom to cover this for Montel News.

Laurence Walker - Deputy Editor-in-Chief, Montel News: 3:37

Thank you very much.

Richard Sverrisson: 3:38

So how serious is Iran's threat to close the strait of Hormuz, and how would this impact global LNG trade? I'm pleased to be joined by Laura Page, principal, LNG analyst at Kpler. And Henning Gloystein, practice head of energy, climate and resources at Eurasia Group. A warm welcome back to the podcast both of you. And Laura, can we start with you? What vessel movements have you seen this week around the Straight to ous in response to the escalating conflict?

Laura Page - Principal LNG Analyst, Kpler: 4:08

Yes. We are watching this really closely at Keppler. Of course, we're a ship tracking service we can see all of the live vessel movements. Firstly it's important to say that. Float is continuing through the Strait of Hormuz and we are seeing Qatari and UAE volume continue to move out of the Strait of Hormuz. Of course, it's a critical choke point for the LNG market. 20% of global supplies come out of there. However, we are seeing some. Should we say delays and disruptions of vessels trying to get back to Qatar and UAE to load? Firstly, Qatar energy has asked vessels to basically wait outside of the straight off Hormuz until a day before loading. So we are seeing some ballast vessels waiting outside of the straight, before they do go to load but we are seeing them heading back to Qatar eventually. They're going at quite a high speed though through the straight in order to get back to Siffan. I was looking at one vessel yesterday and it was going at nearly 20 knots, so very fast. Also seeing some laden vessels that are trying to get into the region to deliver into Kuwait and Bahrain as well. One vessel over the weekend did stop outside of the strait of Hormuz. It was a US laden vessel trying to get over to Kuwait. It's weighted outside of the strait of Hormuz for about five days. But yesterday it did go into the strait of Hormuz again at quite a fast speed. Also looking at. One vessel going to Bahrain, it's carrying Nigerian LNG, and it's outside the strait waiting to pass. So some kind of disruptions going on, but overall it's pretty much business as usual.

Richard Sverrisson: 5:51

That's very interesting, Laura. And Henning, if I can turn to you how likely do you think it is that we will see a temporary close of that strait? I mean, Laura was saying that things are pretty much happening or things are going on as normal, but what do you see the possibility of a closure of the street there?

Henning Gloystein - Practice Head of Energy, Climate & Resources, Eurasia Group: 6:07

Yeah, so we see the risk of a total closure of the straight of Hormuz, which would mean that literally none of the movements that Laura just described are possible at about 20%. So that is a high impact low probability risk. The reasons why we think it's only 20%. First of all we actually think Iran at this stage is reluctant to actually attempt that. We've seen the GCC countries, so the Gulf Corporation countries, they put out a statement in support of Iran. Countries like the UAE and Saudi Arabia are clearly trying to avoid being targeted. And the second reason is that the western naval presence in the strait of immense. Now, there's already a US carrier group with three aerial defense destroyers, several submarines. There's mine sweepers, there's several European air defense frigates there and destroys. So we actually think that even if Iran. Attempted a full closure of the strait of Hormuz. They wouldn't quite manage it because there are plans for convoy systems to be put in place which would reduce the volume and which would still have the risk of single tankers being hit, but would probably not result in a full closure of the strait of Hormuz. And lastly, there is still insurance available. This is an important nugget of information that I find is sometimes misrepresented at the moment. You see all the headlines and there, and this. Understandable that insurance rates are surging. The fact of matter though, is that insurance rate is still available because maritime insurers do provide wartime insurance for shipping in this space. That actually means that you can get your vessel insured even if you're at risk of being hit. So that's why we don't think it's likely, but of course, 20%. Also means we don't think it's impossible. In case of a major escalation the US getting involved Israel trying to strike or striking Iran's oil and gas export infrastructure, if Iran's back to into corner, who knows what will happen. It's something that's worth closely monitoring, as Laura said.

Richard Sverrisson: 7:59

Just following on from what you're saying there heading. So if the US does enter the conflict, does a blockade seem more likely?

Henning Gloystein - Practice Head of Energy, Climate & Resources, Eurasia Group: 8:06

So if the US enters the strikes on Iran Yes. A an attempted blockade of Hormuz by Iran does become more likely, of course. At the moment, one of the reasons Iran is not trying to blockade or massively disrupt shipping through Hormuz is because they're trying to avoid the United States to get involved If the US or when the US is is involved that. That incentive for Iran to hold back is gone. It's worth though pointing out that there is probably some disruption already going on. You've seen the warnings by the UK Maritime trade operations about massive tam tanker jamming. GPS jamming. That stuff doesn't come out of nowhere. Now I don't know who's doing this, but of course that is some form of interference. And so it's working mine. And then as Laura says that these tankers are going at 20 knots, that's taking a big risk. Tankers at 20 knots speeding is it's not the same as a little car going a little bit too fast.

Richard Sverrisson: 8:56

Absolutely not any Laura, how do you see this playing out?

Laura Page - Principal LNG Analyst, Kpler: 8:59

Our base case situation is the straight of Hormuz doesn't shut. Of course, it is vital for Iran to try and keep this open to try and get its oil out of the strait of Hormuz and over to China as well. So that's our base case situation. But yeah, as Henning says we can't rule anything out at the moment. Of course if this does happen it has a massive impact on Asia. Particularly major buyers of LNG. China is the biggest buyer of LNG from the region and also India as well. So they would be the biggest markets affected by this.

Richard Sverrisson: 9:35

We've seen gas buyers in Europe hit 10 week highs and they're still rising and there's still a lot of nervousness in the market. I mean, if we are talking a blockade or, a closure of that strait how would that impact? Prices in Europe and the movement of LNG globally,

Laura Page - Principal LNG Analyst, Kpler: 9:52

prices would absolutely spike. Depends how long this lasts, of course. But prices would have to rise because you'd essentially be shutting in 20% of global LNG supplies. If we look at what Qatar, for example, exported through the strait of Hormuz. Last year, 94% of their supplies went through the Strait of Hall News, of course, and the remaining 6% went to regional local markets like KU eight. So if you take the supply out of the market, it's very big for the market. Of course. As I mentioned, Asia is the biggest buyer of this LNG the biggest importers, China, India South Korea Japan, Taiwan, et cetera. But also you have South Asian markets that are incredibly reliant on Qatari, LNG. For example Pakistan 90% of their imports come from Qatar. So you would have to see them going into the spot market. Of course, prices would be very high. This would be very painful for these markets in order to replace that supply. But we can't also forget Europe. Europe does take Qatari supply particularly. Markets such as Italy Belgium and Poland as well. Europe is on a restocking trajectory at the moment. We need to get stocks as high as possible before winter because we ended winter last year at very low levels. So you'd basically see a fight for cargoes, a fight. For, any available supply in order to keep respective markets operating and balanced. But of course, it depends how long this lasts. If it's a couple of hours, the impact would be limited. If it's days or weeks, you would see a bigger, more sustained impact on prices.

Richard Sverrisson: 11:31

As we saw in the energy crisis when it comes to, often Europe, it's the highest, the cargoes will come potentially to Europe with those South Asian markets losing out if you like.

Laura Page - Principal LNG Analyst, Kpler: 11:44

And we need to remember we're going into summer season as well. So cooling demand is increasing particularly in other areas of the world, such as the Middle East as well. Egypt and Jordan we're going into peak summer season and they're not getting Israeli pipeline gas supply as well. So this all has a big impact on the market and an impact on prices because we could have to see these markets have to buy more LNG to replace the lost Israeli pipeline gas supply. So this adds another kind of bullish factor onto the potential for the straight of Hormuz to shut.

Richard Sverrisson: 12:18

That brings me on to my next question, Henning, and it, Israel has suspended operations at two of its four main Mediterranean gas fields this week. Is this a move from the Israeli authorities simply to block off supply to Egypt? How do you see that?

Henning Gloystein - Practice Head of Energy, Climate & Resources, Eurasia Group: 12:33

No. I think it's a precautionary measure to protect the assets and the workers there. But as Laura said, this is. Exceptionally painful for Egypt. Egypt only was it last week that they the news came out that they'd ordered something like 160 spot cargoes of LNG because of their shortfall in domestic demand. That was even before the Israeli assets were shut down. So this is extraordinarily painful for Egypt. And of course we should keep in mind that Egypt currently has a severe loss of Suez Canal. Transit fees revenues because of the ongoing low volume that's going through there. But this one by Israel is not a measure to punish Egypt. We think this is a measure to protect the workers of the assets in Israeli waters.

Richard Sverrisson: 13:12

If you look at the wider political dynamics between the US, Israel, and Iran at the moment how is that affecting, the global energy picture, Henning?

Henning Gloystein - Practice Head of Energy, Climate & Resources, Eurasia Group: 13:21

Energy markets, the last thing purely from an energy market, of course the worst thing about this is a conflict and there's a lot of people who dying, but from, if you just. Look at this in terms of energy market impacts, the last thing we need is another major energy supply region. Being at risk of severe disruption. The war in Ukraine is still not over. The, there's fighting ongoing, there's a risk of disruption. There's still sanctions abound and more coming. Now we've got the risk of the Middle East happening. This, at some point we're gonna run out of energy options, which I don't think will happen. Oil and gas markets are very good at adjusting, but it is a very distressed market at the moment. And we must keep in mind that places like Europe, most economies in Europe are literally only very slowly creeping out of recession right now. And that is partly in thanks for thanks to inflation coming back down to reasonable levels about. Two to two and a half percent. So if certainly we see oil and gas prices go back to maybe not even as crazy levels as 2022, but I dunno. Let's imagine Brent at$90 and and spot gas at. Something like 30 dollars per MBTU we could see inflation go right back up. And then places like Europe are being tipped in back into recession. And that has political implications that your wage group where policy wonks it causes all sorts of trouble if inflation is higher than GDP growth because that's a stagflationary environment, which basically means that most people are getting poorer. Those are the wider implications of an energy market in which energy costs are too high relative to economic growth. And that is the environment we're in right now, and that's quite concerning.

Richard Sverrisson: 14:50

Absolutely. How do you see this impacting the markets here, Laura? In terms of a wider conflict, maybe an escalation there, what kind of impact could that have?

Laura Page - Principal LNG Analyst, Kpler: 14:59

Yeah. As I mentioned before, we would see prices rise. That's not good ultimately for consumers like residential households, et cetera. But it's also not good for industry as well. We've lost a lot of industrial gas demand since. The crisis of 2022. And it's not really coming back either. We are looking at fertilizer plants are shutting down. Steel and aluminum plants are producing less output as well because of the tariffs situation with the us. The industrial environment is not particularly great at the moment. And if you see prices increase, as Henning said, to 20 $30 per MMB to you, this is very painful for Europe.

Richard Sverrisson: 15:41

Absolutely. And but Henning with oil markets, how have they responded to this current crisis? The prices haven't peaked as much as in gas.

Henning Gloystein - Practice Head of Energy, Climate & Resources, Eurasia Group: 15:49

Oil markets we've, we come to see this every time there's a crisis. What everyone thinks of oil markets, they're very good at adapting to crisis and to new situations. It's always, I think, a little bit of a marvel actually. But just to keep it in dry terms, what's happening is first of all as we speak. Oil is still flowing. That's why there has been no disruption through Hormuz. Insurance rates gone up and everyone's a bit worried, and there's been a couple of delays, but the actual volume hasn't been impacted. What's happened so far is that Iranian crude oil and cons condensate volumes are down. Because some of the private shippers that used to take Iranian oil are refusing to take that because of fear of being bombed. But the Saudis and Emiraties have actually added barrels to the market just over the last week or so. And that is because the market structures of the forward curve for Brent crude oil is in quite steep backwardation right now, which gives oil producers a really strong incentive to add barrels into the market right now. So if you have them as this, as opec and especially the Saudis and Emirates have been saying for a couple of weeks now, actually months now that they would add barrels, this, but so far they've they've talked more and actually done less. But in the last couple of days they have added quite a lot of barrels. They're making a lot of money by it. And you can say things like, we're monitoring the markets very closely and ensuring stability of supply. So they get to say the right things and they also get to make a bit of money on it. But even producers elsewhere, if you're in the United States, the last months were not good. Because of the announcement by OPEC to raise supply or reduce their. Supply cuts over the last year that they've been doing for the last few years. But the market conditions over the last two weeks have changed in a way that if you have additional oil, you just throw it into the market. So that is one of the reasons why. Oil hasn't surge more than some people might have expected. And the other aspect is there is a lot of supply versus demand growth. You saw the IEA figures at the start of this week. They said that oil demand growth would be about seven, 750,000 barrels per day this year. We actually think that's even an overstatement. I'm pretty sure it's quite, not much more than half a million barrels per year day for 2025. But as su su supply growth is expected in excess of a million barrels per day. So we have a building over supply because demand growth, especially in China, is pretty much zero. And and producers are adding so un until that changes be it for instance, in straight of Hormuz or some other disruption. The reality is that there's more oil, new oil coming to the market. The new consumption is being registered. And that means all markets are at this stage, pricing in the risk of a disruption rather than the physical disruption.

Richard Sverrisson: 18:13

If we look at the states, is this increasing Europe's dependence on LNG from the us Henning as well?

Henning Gloystein - Practice Head of Energy, Climate & Resources, Eurasia Group: 18:20

Potentially, yes. We've got the moves by the European Commission to, to try and phase out in Russian gas entirely by 2027. There'll be some negotiations on the fringes of that. By and large, that's probably gonna happen now with the Middle East. A risk factor that will put off a fair few people of engaging more in long-term purchases from the Middle East. And so of course, where else is new LNG come to the market, the United States is one of them. But of course we have those tricky trade talks between the EU and the United States, which also make things a bit complicated. So it's not a done deal yet that the Americans will walk away from this as. Profiteers and saying Hey, we've taken all the future or remaining demand of Europe. That's not a done deal yet, but it's potentially the case. The one country that is really benefiting from this is of course Norway. That is the closest supplier of oil and gas to Europe. It is the one with which the European Union and the UK has by far the best relationships. So anything Europe, Norway can produce, in addition to what they're doing now, will go to Europe at very good prices.

Richard Sverrisson: 19:16

But they're producing at the moment absolutely full steam. I mean that what, where's the upper limits here, honey? Is there much more that they can actually export?

Henning Gloystein - Practice Head of Energy, Climate & Resources, Eurasia Group: 19:24

I think if, The price and the conditions are right, you can always get a little bit more out. But you're right. Norway is not in a position to raise its oil and gas output by 20% or so. Again, they've, I think it's, it looks pretty maxed out, but I think it can always push a little bit if the conditions are right.

Richard Sverrisson: 19:37

And Laura, how do you view this? The, obviously the European Commission is very keen to end Russia gas, so now saying it's gonna, it's gonna look to ban it and very soon, are we facing a an LNG, real squeeze on supply in, in Europe and the years ahead?

Laura Page - Principal LNG Analyst, Kpler: 19:54

Yeah, I think the, definitely the biggest impact is gonna be at the end of 2027 when we lose the long term contract. We think that Europe can get by with the spot volumes and the short term volumes being ceased over the next kind of year or so. But that is gonna be the biggest impact really in 2028 when we lose the long term pipeline supply and the long term. LNG contracts, and we think that really the biggest impact is gonna be on the CEE area. Of course this is a landlocked area. We're talking about places like Slovakia, Hungary, et cetera. They are landlocked. And they would have to tap into the LNG market. And so to get LNG into Europe and then through the pipelines over to Slovakia and Hungary is very expensive. They're going to be most at risk. But we also need to remember the dynamics and the situation in 2028 are gonna be quite different to where they are now because we have a lot of us LNG coming online and Qatari volume coming online as well. So we've already started to see that us LNG starting to come online. We've got Plaquemines and. Corpus Christi expansion this year. And more to follow. And then in late 2026 we have Q4 2026 for our first cargo. We'll see Qatar starting to come online. We do think prices will generally be lower in 2028 than they are now. But of course if you knock off a lot of Russian gas supply it will of course have an impact and we will need to see Europe being more heavily reliant on the LNG market because as. Very little flexibility elsewhere. We've just spoken about Norway, for example. Very limited flexibility to get a lot more gas supply from Norway. The same with Algeria where we have tight domestic balances. Azerbaijan is pretty much maxed out as well. So limited flex, more reliance on the LNG market and we'll be looking to the US and possibly Qatar as well for that.

Richard Sverrisson: 21:59

Very tense moments in the weeks ahead, I think would be fair to say, but maybe in the mid to long term, there is more supply coming on, on stream. Laura and Henning, thank you very much for joining the Plugged In podcast.

Henning Gloystein - Practice Head of Energy, Climate & Resources, Eurasia Group: 22:11

Thanks. Pleasure.

Laura Page - Principal LNG Analyst, Kpler: 22:12

Nice to speak to you. Thank you.

Richard Sverrisson: 22:13

As we said, this situation is moving very quickly and is one that we're covering closely here at Montel News. You can stay up to date with the latest coverage of the conflict and its impacts on global energy markets on Montel News.