LNG traffic through Hormuz grinds to a halt again
The return of war and the battle for Hormuz could once again result in an extended outage. After several weeks of relative calm, volatility has returned to global oil and gas markets.
Oil and gas flows through Hormuz are once again blocked. A cycle of escalation began a week earlier after a projectile hit a Qatari LNG tanker off the coast of Oman. QatarEnergy said it would pause efforts to rapidly revive disrupted LNG production at the Ras Laffan complex, and it would cut the number of ships that had planned on docking at the site. Iran attacked another container ship in subsequent days.
In response, the U.S. suspended a sanctions waiver and restarted military strikes. Ship crossings through the Strait of Hormuz totaled just 14 on July 12th, the lowest level in a month. Iran declared the Strait “closed.” A trickle of ships are sneaking through the Strait with their transponders turned off, but overall, ship traffic is once again at a near standstill.
On Monday, President Trump announced that the embargo on Iranian ships would be put back into place, and bizarrely, he said that ships would need to pay a 20 percent toll as compensation to the U.S. Navy for the cost of protection. Experts have said this fee could double the cost of shipping.
Qatar urged all vessel owners to “temporarily suspend navigation and marine activities” until further notice.
Oil and gas prices spiked on the news, with crude prices up more than 9 percent. TTF prices shot up more than 8 percent to $17.61 per MMBtu.
The likelihood of another extended blockage of the Strait is now a very real possibility.
“With Hormuz crossings now moving lower, the ramp in Qatari LNG loadings, which had recently modestly lagged our expectations, will likely drop,” Goldman Sachs analysts wrote in a note to clients on Monday. “This poses further downside risk to European LNG imports, especially given that Asia spot LNG prices (JKM) remain high enough relative to European gas prices (TTF) to incentivize flexible US LNG loadings to head to Asia instead of to Europe.”
Goldman analysts said that investors are now pricing in a 45 percent probability that “price-driven destruction of Asia LNG demand will be needed to help manage European gas storage higher.”
When asked if he would send ships back through the Strait, Herbjørn Hansson, CEO of Nordic American Tankers said: “No. Absolutely no. We will not do that. The crew of the ship is the main concern.”
He said that Trump’s proposed 20 percent toll on shipping is not realistic. A return to normal shipping traffic would only be possible with a negotiated settlement. “Iran and America, they have to agree,” he said during a CNBC interview.
Other experts also panned Trump’s proposed shipping toll. Bob McNally of Rapidan Energy Group dismissed Trump’s statement as “brinkmanship, posturing,” and “a distraction.”
Nevertheless, there are real threats to ongoing oil and gas flows, including the resumption of the U.S. blockade, and a sudden outbreak of violence between Saudi Arabia and the Houthis in Yemen, McNally said.
On Monday, Saudi Arabia bombed an airport in Yemen, and the Houthis fired missiles at Saudi sites, ending a multi-year cessation in violence between the two sides. If a war resumes, the prospect of more violence in the Red Sea looms as another possible major outage to oil and gas flows through the region.
By Monday night, the U.S. was continuing military strikes on Iran. Worryingly, the pattern of tit-for-tat strikes appears to be giving way to something resembling fullblown war. President Trump officially notified the U.S. Congress that the military campaign had resumed, perhaps a sign that he does not view the American bombing campaign as a one-off.
Both the U.S. and Iran have sent some signals that, while comfortable with ongoing airstrikes and retaliation, they don’t necessarily want a return to a full-scale war, analysts at the Washington-based energy consultancy ClearView Energy Partners said in a note.
“Even so, it might be hard for the White House to prevent the war from escalating,” the firm said. Iran recently expanded retaliation to include Jordan, for example, as well as a Kuwaiti offshore oil platform. “Even without a return to full-out combat, it might be hard to keep a lid on prices,” ClearView said.