The Legacies of the Middle East Energy Crisis

Corey Stewart, Vice President Americas at General Index, was joined by Claudio Galimberti, Chief Economist at Rystad Energy, and Fatima Kader, Head of Generation Fuels Americas at General Index. They discussed how the conflict in the Middle East and the disruption in the Strait of Hormuz have affected oil, gas, and power markets. The session was recorded about three months into the conflict.

The largest disruption on record

Claudio said 10% to 12% of global oil production has been shut in, more than in any supply shock of the past 55 years. The 1974 oil embargo, the previous largest, affected about 4% of supply. The economic damage has been limited so far for two reasons. The crisis is still short compared with past shocks, and the market entered it with high inventories and strategic petroleum reserves in the US, Europe, and Japan. He warned that if Hormuz is not reopened, prices could reach $180 to $200 per barrel and push the global economy into recession.

Physical crude has moved more than futures

Corey said the gap between physical and futures prices has been the main story of the cycle for US crude. GX data shows WTI Midland averaged about $61 per barrel in January and $65 in February. It then rose to about $92.50 in March and $101 in April. The East Houston premium over Midland widened from 23 to 36 cents before the conflict to a peak of $2.11 in the week of April 6. Buyers were paying more for barrels with access to export terminals on the Gulf Coast.

The quality spread changed even more. WTI East Houston normally trades at a premium to Mars, a medium sour grade, and that premium was $2.38 per barrel before the conflict. In March the spread flipped, with Mars trading $4.45 above WTI East Houston, and Mars was still at a $1.06 premium in May. Asian refiners paid $12 to $16 per barrel over Dated Brent for Midland WTI cargoes in March and April. Corey expects these differentials to tighten as supply returns. He said more buyers in Korea, Taiwan, Japan, and Thailand are now negotiating deals priced against Houston-delivered Midland WTI.

US gas has stayed relatively calm

Fatima said Henry Hub has not followed TTF or JKM higher because US storage is ample and LNG export terminals were already running near capacity, so little extra gas can leave the country. In West Texas, high crude prices are increasing Permian drilling and the associated gas that comes with it. Pipeline constraints trap that gas in the region, which can push Waha prices below zero. She expected LNG demand to keep a floor under Henry Hub through the summer and fall, with prices broadly stable unless weather or a major geopolitical event intervenes.

What is likely to last

Claudio expects energy security to remain the top priority for governments for at least a year, even if the Strait reopens soon. He expects more countries, particularly in Asia, to build strategic reserves. He also expects the oil price risk premium to rise from its usual $1 to $2 per barrel to $5 to $10. What surprised him most was that Iran could stop most traffic through Hormuz using drones and unmanned vessels after much of its military had been destroyed. That raises questions about other chokepoints, including Malacca and Bab el-Mandeb.

Beyond that, he cautioned against calling other changes structural. If the conflict is fully resolved, he expects prices to fall to $60 to $80 per barrel in 2027, with little lasting change in oil demand. Over five years, he expects the main legacy to be investment in supply redundancy, which will raise the cost of energy worldwide.

Watch the full webinar below.