Iran Attacks Expose Global Gas Market Vulnerabilities

Recent Iranian attacks have triggered a significant spike in European gas prices, highlighting a critical vulnerability in the global energy market: its increasing reliance on gas and the concentration of supply routes through the Strait of Hormuz. Although oil markets have shown relative stability, the gas market’s reaction underscores a growing dependence that the world is less prepared to address than its dependence on oil.

The Strait of Hormuz: A Gas Chokepoint

For decades, the potential disruption of oil flows through the Strait of Hormuz has been a primary concern. Yet, the reality is that gas, not oil, is now more exposed to closure of this vital waterway. Approximately 20% of global oil transits the Strait, compared to roughly 3% of global gas consumption. However, this statistic is misleading. The majority of gas is consumed locally or transported via pipelines. Only 10-15% of global gas is liquefied into LNG and transported via tankers, making the Strait of Hormuz critically important for seaborne gas trade.

Around 86 million tonnes of LNG – primarily from Qatar – pass through the Strait annually, representing about a fifth of the total seaborne LNG market relied upon by major importers like China, Japan, and the European Union. Financial Times reports that spot gas prices at the European TTF hub rose over 40% on Monday following Iranian attacks that led to production shutdowns in Qatar, while benchmark Brent crude saw a more modest increase of 6%.

Uneven Preparedness: Oil vs. Gas

A key difference between the oil and gas markets is the level of preparedness for supply disruptions. The world has proactively addressed its oil dependence through strategic petroleum reserves. Members of the International Energy Agency (IEA) collectively hold enough oil in strategic storage to cover 613 days of import requirements. China has also significantly increased its reserves, now estimated at between 1.1 billion and 1.2 billion barrels – equivalent to over 10 days of global oil usage.

Natural gas storage, however, is less comprehensive. Europe holds approximately 100 billion cubic meters of storage, roughly a third of its annual consumption. However, this storage is unevenly distributed, with Germany, Italy, and Austria holding around half of the continent’s capacity. The UK relies on the assumption of free gas flow across borders, a potentially unreliable proposition in a crisis. European gas storage was, on average, less than 30% full coming out of the winter season, lower than usual for this time of year, necessitating substantial purchases to reach the EU’s 90% winter storage target.

Future Outlook and Resilience

While increased LNG export capacity, particularly from the US, will offer some cushioning, the recent disruption highlights the need for greater resilience in the international gas system. This includes discussions on increasing storage capacity and accelerating the development of renewable energy sources. Financial Times notes that subsidies or incentives may be necessary to support gas companies meet storage targets if prices remain high.

Insurers are already responding to the increased risk, with policies for ships in the Gulf being cancelled and prices raised. Financial Times reports that this is a direct consequence of the US and Israel’s attacks on Iran, and the resulting war risk.