The ongoing conflict in the Middle East is exacerbating the energy market crisis as each day passes. Prices of various energy commodities such as gas, oil, jet fuel, and plastics are experiencing significant increases.
The situation is expected to deteriorate further in the coming week or two. Energy shipments came to a halt on February 28 when the war commenced, leading to the closure of the Strait of Hormuz by Iran. However, several ships managed to leave the area just before the conflict started. The final batch of these ships is anticipated to reach Japanese and Korean ports within the next 8-10 days.
Following these deliveries, there will be a significant void in incoming shipments. According to Rory Johnston, founder of Commodity Context, approximately half a billion barrels of oil that would typically pass through the Strait of Hormuz have now been disrupted.
In the oil industry, there exists a distinction between paper oil, which comprises contractual agreements for oil transportation, and physical oil, which refers to actual barrels being transported. Currently, there is a shortage in paper oil contracts, but once the final oil shipments from the strait reach their destinations, the scarcity will shift from the theoretical realm to the physical realm.
In response to the supply shock, governments worldwide have collectively decided to release 400 million barrels of oil from strategic reserves. Despite these efforts, Japan’s vice minister for international affairs, Takehiko Matsuo, expressed that this action is insufficient to address the supply challenges, noting that Japan only has about three weeks’ worth of gas in storage.
Meanwhile, natural gas futures prices have surged even more than oil prices since the conflict began, with Asian benchmark JKM futures experiencing a 90% increase. The disruption in gas transit through the Strait of Hormuz amounts to approximately 120 billion cubic meters, as highlighted by Bridget Payne, head of energy forecasting at Oxford Economics.
The impact of the crisis will vary across different countries, with economies heavily reliant on natural gas for industrial purposes being particularly vulnerable. Pakistan, for instance, has already witnessed physical shortages due to its proximity to the region and the recent disruption in shipments.
The uncertainty surrounding the timeline for normalizing shipments through the Strait of Hormuz and the slow pace of tanker travel further compound the challenges. Moreover, Oxford Economics predicts that the strait will likely remain impassable until May, with geopolitical tensions disrupting trade through September.
As the crisis unfolds, industry experts and policymakers are convening in Houston for the annual CERAWeek conference to address the challenges faced by the energy sector. Despite the current atmosphere of optimism among industry players, fueled by hopes of a swift resolution, the prolonged disruption calls for a more grounded approach to addressing the crisis effectively.
