THE ECONOMIST: Even the best-case scenario for energy markets is disastrous

The third Gulf war is now in its fourth week. Every day that Iranian strikes on ships keep the Strait of Hormuz shut, around a fifth of the world’s output of oil and liquefied natural gas (LNG) remains stranded. Every day, therefore, traders update how much supply is lost for the year.

As their estimates rise, so do energy prices. Brent crude, at $US112 ($160) a barrel, is 54 per cent dearer than before hostilities began. Gas prices in Europe are up by 85 per cent.

The reason they are not much higher is that investors expect flows to resume soon

. Financial bets that prices will fall (“put” options) outnumber those expecting a rise (“call” options) for July deliveries and onwards, according to Société General, a bank. Account for transport lags, in other words, and investors expect normality by May.

To assess those expectations, The Economist calculated how long normalisation would take if the war ended today.

Even if Iran accedes to Donald Trump’s threat on March 21 to unblock the strait within 48 hours or face strikes on its power plants, a big “if”, global oil and gas markets would remain undersupplied for months, hurting the world economy.

For energy markets to right themselves once Hormuz reopens, three things need to happen. First, Gulf producers must restore output to pre-war levels. Second, ships must ferry that output to refiners abroad. And third, those refiners must process it into usable fuel. Each stage of this industrial relay takes time.

Start with production. Unable to export and faced with storage constraints, Gulf countries have already cut their output of crude by a combined 10m barrels per day (b/d), equivalent to 10 per cent of the global total and 40 per cent of their pre-war level.

To bring this back online, producers must check everything still works and clear pipe blockages. Only then can they restart wells by restoring pressure — and gently, to avoid damaging reservoirs. Revving up the separators, compressors and treatment plants where oil goes for initial processing will take additional time.

Although as members of OPEC, Gulf states are used to modulating output up and down in days, the latest cuts are more sudden and deeper than anything they have faced before. Experts reckon all this will take between two and four weeks.

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 badly damaged two of the plant’s 14 liquefaction units, accounting for 17 per cent of its capacity — and 3 per cent of global supply. Repairs will take 3-5 years, Qatar’s energy minister says, and a planned expansion will be delayed. The full extent of the damage elsewhere is unclear. But weeks of repairs are probably needed for any operations to resume even in facilities that suffered less of it.

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

Next comes shipping. In the event of a ceasefire, most captains of the 480 or so vessels stranded in the Gulf would want to see several days free of attacks before attempting to exit. Most tankers are already loaded and the strait can handle heavy traffic, 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 for many weeks. Iran has attacked port facilities across the Gulf, hitting fuel tanks, warehouses and ships at anchor.

The terminals appear largely intact but some damage may not have been disclosed. 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. Those insurers still writing cover have raised rates from 0.2-0.4 per cent of vessel value to 1 per cent or more, with the riskiest voyages fetching 10 per cent. Anyone with internet access can identify a ship’s owners or charterers, making vessels linked to Iran’s enemies a potential target if tensions flare. Insurers will not reprice policies down in a hurry, says Ellis Morley of Howden, a broker.

And even once insurance becomes available — and affordable — again, captains and 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, unsure if they can take the Houthis, who are sponsored by Iran, at their word.

Further delays will be caused by the world’s tanker fleet 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 opt to complete their current voyage — pick up oil in America, drop it off in China — before heading to the Gulf. The round trip usually takes up to 90 days, says Andrew Wilson of BSR, a broker.

Even once Gulf crude belatedly reaches faraway refineries, this will not immediately relieve fuel shortages. Some in China, India, Malaysia and Thailand have closed whole units for want of raw material. Asian refiners’ total throughput is down by 3 million b/d, or 8 per cent.

Once Gulf crude returns, revving those plants 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. As with upstream production sites, restarting downstream refineries means checking and purging every pipe; restoring power, steam, cooling water and compressed-air systems; and heating processing units slowly to avoid cracking the metal. The same goes for LNG regasification plants.

Even if Donald Trump and Iran reached a deal to stop fighting tomorrow, it would thus be another four months before markets regained some semblance of normality. Producers elsewhere cannot crank up output fast enough to recover past losses.

The result is to shave off some 3 per cent of planned global oil production this year. Every month Ras Laffan stays shut, the world loses around 7 million tonnes of LNG — nearly 2 per cent of projected annual supply. And full capacity will, owing to the latest strikes, be lower than before. The upshot is that production will fall 4 per cent short 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, they could trigger bouts of panic-buying and price spikes. 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.

Oil and gas traders are still banking on a spring miracle. The world is praying for one. But even if Mr Trump and Iran’s ayatollahs grant this wish, the logistics of oil and gas will not be easily appeased. Energy markets will be living with the war’s fallout well into northern winter.