The war in the Middle East has hit natural gas harder than oil: what’s happening in the market
26 March 11:17
At first glance, it seems that the war in Iran is affecting both oil and gas equally: missile and drone attacks, as well as disruptions to maritime transport, have had a devastating impact on all shipments through the Strait of Hormuz.
However, what appears to be symmetry on the surface is, in fact, a critical imbalance. In the global gas supply chain, there are fewer options for rerouting, and storage capacity in the gas market is smaller than in the oil market, making the war’s consequences for gas consumers significantly more severe, reports "Komersant Ukrainian", citing Reuters.
Building and repairing key gas infrastructure—especially liquefied natural gas (LNG) plants—is more complex and expensive than in the oil industry. After shutdowns, oil refineries can often resume operations faster than LNG export hubs.
Prices have clearly reflected this imbalance: since the start of the conflict, European and Asian gas contracts have risen much more sharply than oil, and this gap signals that recovery in the gas market will take longer than in the oil market.
Bad Timing
The timing of the gas supply disruption also turned out to be the worst possible. As calculated by the Energy Institute, global demand for gas has grown roughly twice as fast as demand for oil over the past decade, driven by the expansion of pipeline networks and gas storage facilities.
This trend was expected to continue, particularly in developing economies transitioning from coal to gas. Optimistic prospects for gas demand were even the main driver behind the gradual expansion of the global LNG industry.
However, LNG supplies from Qatar—the world’s second-largest LNG exporter—unexpectedly declined after attacks from Iran reduced Qatar’s export capacity by 17% for up to five years.
As a result, the spike in gas prices served as a warning about the risks of heavy reliance on imports and is likely to slow the further expansion of gas-fired power plant capacity.
At the same time, the range of electricity sources available to utilities and households is wider than ever.
Solar panels and battery systems offer electricity providers a much faster and cheaper way to increase electricity supply than expanding gas-fired power plant capacity, which can take years.
The cost of key components in the gas power sector—especially turbines—has also surged, partly due to a spike in demand from wealthy economies building data centers.
Storage Challenges
An additional complication is that storing gas is much more difficult than storing oil.
Oil and petroleum products remain liquid at room temperature and can be easily stored in various onshore tanks, as well as in offshore tankers, in case of supply disruptions in the market.
Natural gas occupies a much larger volume than oil when stored at room temperature and must be compressed or supercooled to turn it into a liquid for more economical storage.
This limits storage options and significantly increases costs.
Gas consumption patterns also vary significantly by season: in most economies, demand peaks in winter and drops sharply during the off-season.
This contrasts with the steady consumption pattern of gasoline, jet fuel, and other types of fuel, for which demand remains relatively stable year-round in most major economies.
Even if military operations end quickly, this will not ease the situation in the gas market: it will take years just to restore exports from Qatar, and it is unlikely that buyers who have already begun to switch away from gas will return to this market.
Some major economies, such as the United States, are expected to remain heavily dependent on gas.
However, more price-sensitive markets will collectively reduce their dependence on gas, leaving an indelible mark on the entire industry and shattering previous hopes for steady growth.
