Even the best-case scenario for energy markets is disastrous

The third Gulf war will soon be in its fifth week. Every day that Iran keeps the Strait of Hormuz shut, around a fifth of the world’s output of oil and liquefied natural gas (lng) remains stranded. And every day, traders update how much supply is lost for the year. As their estimates rise, so do energy prices. Brent crude, at $105 a barrel, is 45% dearer than before hostilities began. Gas prices in Europe are up by 65%.

The reason they aren’t higher is that investors expect flows to resume soon. Financial bets that prices will fall (“put” options) are clustered around $80 a barrel for July; bets on a rise (“call” options) are more spread out (see chart 1). Account for transport lags, in other words, and investors expect normality by May.

To test those expectations, The Economist has calculated how long normalisation would take if the war ended today. Even if Iran agreed to open the strait, global oil and gas markets would stay undersupplied for months. To set them right, three things need to happen. Gulf producers must restore output to pre-war levels. Ships must ferry that output to refiners abroad. And those refiners must process it into usable fuel. Each of these takes time.

Start with production. Unable to export and facing storage constraints, Gulf countries have already cut their output of crude by 10m barrels per day, 10% of the global total and 40% of their pre-war level (see chart 2). To bring this back, producers must check everything still works and clear pipe blockages. Only then can they restart wells by restoring pressure—gently, to avoid damaging reservoirs. Revving up the separators, compressors and treatment plants for initial processing will take more time. Experts reckon on two to four weeks in all.

Gas looks even gnarlier. Qatar’s Ras Laffan, which supplies nearly a fifth of the world’s lng, has been shut since March 2nd after an Iranian drone strike. In the past week a missile strike damaged two of its 14 liquefaction units, accounting for 17% of its capacity and 3% of global supply. Repairs will take three to five years, Qatar’s energy minister says, and a planned expansion will be delayed. Weeks of repairs are needed for any operations to resume.

Mending is just the start. The equipment must be purged of moisture to ensure that pipes do not crack as it is cooled back to -160°C. Rush it, and the metal contracts unevenly, shattering welds. Anne-Sophie Corbeau of Columbia University reckons all this could take up to seven weeks.

Next, shipping. Most captains of the 480 or so vessels stranded in the Gulf would want several days free of attacks before attempting to exit. Most tankers are already loaded, so the backlog could be cleared in a fortnight. In principle, new ships could then come in to pick up the gradually restarting production.

In practice, few vessels may oblige so soon. Iran has attacked ports across the Gulf. Although terminals appear largely intact, sunken vessels or infrastructure may need to be cleared to ensure safe passage, observes John Ollett of Argus Media, a price-reporting agency. Repairs to piers or loading equipment typically take months.

Moreover, most war-risk insurance in the region has been cancelled. Insurers still writing cover have raised rates from 0.2-0.4% of vessel value to 1% or more, and 10% for the riskiest voyages. Anyone with internet access can identify a ship’s owners or charterers, making vessels potential targets. Insurers will not lower prices in a hurry, says Ellis Morley of Howden, a broker.

Even once insurance becomes available—and affordable—again, shipowners may hesitate. Although Yemen’s Houthi rebels formally ended their two-year campaign against Western-aligned vessels in the Red Sea last November, half as many oil tankers (and virtually no lng tankers) are risking the passage as in 2023.

Further delays will be caused by tankers being in the wrong place. When the war erupted, the supertankers that once ferried Middle Eastern crude to Asia went looking for business in the Atlantic. When Hormuz reopens, many will complete their current voyage—pick up oil in America, drop it off in China—before heading to the Gulf (see chart 3). The round trip usually takes up to 90 days, says Andrew Wilson of bsr, a broker.

Their delayed arrival will not immediately relieve fuel shortages. Some Asian refineries have closed units for want of raw material. Getting them back up might take a few weeks. Emergency shutdowns in particular can take months to undo, says Ajay Parmar, a former engineer at TotalEnergies, a French energy giant.

Thus even if fighting stopped now, it would be four months before markets regained some semblance of normality. The result is to shave some 3% from planned global oil output this year. Every month Ras Laffan stays shut, the world loses nearly 2% of annual gas supply. And full capacity will, owing to the latest strikes, be lower than before. Production would be 4% shy of demand this year even if Qatar started pumping what it can today.

The implications are stark. Global crude stocks, on course to end March in the bottom third of their historical range, will also keep dwindling for weeks after Hormuz reopens. As countries with thin buffers run out, bouts of panic-buying and price spikes could ensue. Bidding wars for lng are equally likely. The last cargoes from Qatar to leave before Hormuz closed will reach Asia and Europe in days, says Ashley Sherman of Vortexa, a ship-tracker. After that, buyers must seek supplies elsewhere or go without, jeopardising the restocking of reserves for winter (see chart 4).

Oil and gas traders are still banking on a spring miracle. The world is praying for one. But the logistics of oil and gas will not be easily appeased. Energy markets will be living with the war’s fallout well into the northern winter. ■