Middle East escalation and the scramble for LNG, with Sindre Knutsson

**Episode: Middle East Conflict & Global Gas Markets** *Taped: Tuesday, March 10th* *Host: Noah Brenner | Guest: Sindre Knutsson, Head of Commodity Markets, Rystad Energy* --- **[0:00]** Welcome to *Let's Talk Energy*, your go-to podcast for smart energy insights. I'm Noah Brenner, and each week we bring you an inside look at the dynamics shaping global energy markets through in-depth conversations with Rystad Energy experts and special guests. At the time of this taping on Tuesday, March 10th, about 20% of the global LNG supply remains cut off from the market. Attacks by Iran on vessels transiting the Strait of Hormuz, and the reaction of insurance companies canceling coverage for ships carrying oil and gas through that area, has cut off some 77 million tons per annum of LNG liquefaction capacity in Qatar and another roughly 10 mtpa from the UAE. Most of that gas was destined for countries in Asia, but the supply shortage has spooked global markets as countries scramble to secure the supplies they need to keep the lights on and their economies running. So what has been the market reaction to this supply disruption? How does it compare to the 2022 price shock following Russia's invasion of Ukraine? What are some of the scenarios for how the market could normalize, and how long could that take? And what are some of the longer-term impacts on how countries will think about the security of their natural gas supplies? To help us understand the wide-ranging impacts of the Middle East conflict on global gas markets, we're joined today from Oslo by Sindre Knutsson, Head of Commodity Markets for Rystad Energy. Sindre, welcome to the program. **Sindre Knutsson:** Thank you so much, Noah. Let's talk energy. **Noah Brenner:** What's been the price trajectory we've seen in Europe and Asia since the start of this conflict, and what factors are influencing it? What are traders responding to? **Sindre Knutsson:** Prices have been up. You've seen prices go 60–70% across the European market. In Asian markets, you've seen a spike even bigger — up to 120% at some point. The reason is that it's primarily the Asian market feeling the deficit, given the pause in Qatari volumes. The arbitrage window is now open for Asia to attract cargoes, which is why you see a higher spike in Asian markets compared to European ones. --- **[4:00]** **Noah Brenner:** Can you put this in some context? The last gas crisis the world felt was following Russia's invasion of Ukraine. How does this compare? **Sindre Knutsson:** I would say it's very much different. Even though you can argue that the current loss of Qatari volumes is quite similar on an annual basis to the transition away from large amounts of Russian gas, the state of the market itself is different. If you look at the macro picture — going back to the Russia-Ukraine war — we had just come out of COVID, we had underinvested in oil and gas, and new gas production facilities, including LNG, coming online were very limited in the years following the outbreak of that conflict. However, looking at the market today, we've made a lot of investments in new LNG facilities. The LNG market is set to grow by almost 40% between now and 2030. The macro picture is very different. New supply will come online, and before this war broke out, one of the key topics was when we'd start to see surplus and when prices would decline. The overall impact of the current crisis will be smaller than what we saw before — but still, prices are spiking to levels that are driving demand destruction, just as they were back in 2022. **Noah Brenner:** Is there an argument that we haven't even seen the worst of it? In the Russia-Ukraine crisis, gas prices spiked most sharply in August when Europe was trying to refill storage. Is there potentially worse on the horizon for global markets? **Sindre Knutsson:** The worst shock back in 2022 was when the Nord Stream pipeline volumes disappeared — that drove an extreme shock into the market. Do we have the worst in front of us? That may very much be the case. We're expecting an initial shock, but there is an expectation that volumes will start to flow one way or another. There is still a possibility that things drag out — that it takes time for volumes to come back both on the LNG side and the upstream asset side. So it's a valid point that we may still see the worst price spike ahead of us if there's no resolution. **Noah Brenner:** How much global gas storage do we have? Do key consumers have the storage needed to provide a buffer here? **Sindre Knutsson:** Storage is primarily meant to deal with seasonality, because there is extreme seasonality on the gas side — mainly driven by winter demand. In the northern hemisphere we have a significant difference between winter and summer demand. The main markets with storage are the United States — though that's not really relevant for this current market shock — and Europe, where storage is limited. Northeast Asia also has some storage, which creates a buffer. But for many importers of Qatari volumes further south — looking at South and Southeast Asia — storage capacity is much more limited, making the LNG market very vulnerable. --- **[8:00]** **Noah Brenner:** Are there any sources of supply that could step in here? If you can produce LNG into this market it seems quite lucrative — but can producers add additional volumes? **Sindre Knutsson:** LNG production was already running at a very high rate, as it typically does during the winter months. Looking at the US — the world's biggest LNG exporter — they are already running at 115% of nameplate capacity. It will be more difficult to continue at this rate going into the spring season, when warmer temperatures make it harder to bring gas down to liquefied temperatures. There may be some sources in Africa where you can try to produce a little bit more, but that would be limited. One thing that can make a slight difference is delaying maintenance schedules. Some producers do maintenance in the spring shoulder season. If you delay some of that maintenance, it can help in the very short term to absorb some of the shock — but you'll just shift that maintenance to the other side of summer. **Noah Brenner:** Is there also a shortage of vessels? We have vessels trapped on the wrong side of the Strait essentially. Are there enough vessels in the market to move the gas that is available? **Sindre Knutsson:** The majority of vessels are now waiting outside — ballast vessels going back to load are currently positioned closer to India, waiting to come in. Overall, you definitely saw a shock in the shipping market with charter rates spiking. One of the main drivers was that the Asian market went to a significant premium above Europe in order to attract cargoes, meaning you're increasing the shipping distance quite significantly — for example, from the US Atlantic basin around South Africa to get to Asia versus Europe. At the same time, volumes disappearing from Qatar means less shipping demand, which could push rates down — but that depends on what you're doing with the vessels previously assigned to Qatar. You have seen over the last few days that rates are actually coming down a little from the initial shock, which drove rates up around 600% or so on the shipping side. **Noah Brenner:** The other problem has been insurance. Is there an argument that it's actually been the western insurance industry — refusing to insure ships moving through the Strait — that's really causing the problem? Was this a blind spot for the industry? **Sindre Knutsson:** Insurance is an issue. However, you're seeing some companies willing to insure those vessels, so it's still a possibility. But I think in the end it's more than just insuring the vessels. You see a lot of ship owners who simply don't want to put their crew and their vessel through the Strait if there's a risk of attack. So in the end, it's about safety — and as many ship owners have decided, if there is a significant risk of your vessel being attacked and lives are at risk, they won't take that route. --- **[12:00]** **Noah Brenner:** Can you step us through what a restart could look like over a couple of different time periods and scenarios for how long the conflict might last? **Sindre Knutsson:** It all boils down to two elements: when we'll see the Strait of Hormuz reopen, and how quickly we'll see upstream and LNG production come back. On the Strait — we think it can reopen even with the war continuing. The main challenge is that vessels will likely need to be escorted through. This is what has been communicated from America — that they will escort crude, LNG, and product tankers through the Strait. More countries are coming in to support that, including France. Under our most likely scenario, when the necessary military capacity to escort vessels is in place, you can start to see an increase in flows, and that is likely to happen within about 3 weeks of the war breaking out. There will be so much pressure — the longer it's closed, the higher energy prices rise, and it's in more or less everyone's mutual interest to see these flows return. That applies to the energy-revenue-dependent countries in the region, to Asian buyers and China heavily relying on energy and LNG from this region, to Europe which is heavily exposed to higher energy prices, and to the US mainly on pump prices for products and oil. Then there's the upstream and LNG production side of things, because Qatar — the big LNG exporter — has shut down operations both on the LNG side and the upstream side. It may take two to four weeks to get upstream volumes back — maybe as quick as one week, but the longer you wait, the longer it may take. **Noah Brenner:** Do we know if these facilities have been damaged, or have they been shut down as a precaution? **Sindre Knutsson:** As of now, it's interpreted as a precaution — there's no damage to the LNG facilities, at least. If it takes one to four weeks to get the upstream gas back, it will then take another week from reintroducing gas into the LNG liquefaction plant until you see first LNG. So there's a lag — it will take at minimum two weeks from getting the go-ahead to start production again before we see these volumes. There is some LNG in storage tanks that can come out quicker — we saw a cargo loaded last Friday after the conflict started — but you're looking at a minimum two to three week timeline to really see LNG production coming back. --- **[16:00]** **Noah Brenner:** Is there a risk premium in the market right now, and could we see some percentage drop as the market normalizes to more basic supply-demand fundamentals? **Sindre Knutsson:** A good example of the risk premium was what we saw over the weekend — you saw Brent prices spiking, and then TTF and Asian LNG also spiking on the geopolitical risk of the war lasting longer. If you look at President Trump's communication — he indicated he would like to approve new leaders in the country, and then you saw a new successor being appointed, in addition to attacks and other events over the weekend — you saw a strong reaction. Then on Monday evening you saw communication that "we are ahead of schedule, the war will soon be over," and you saw the market react. So you can see the geopolitical premium in the market and how it's impacting pricing. The second you see any signs of resolution and volumes coming back, prices will come down again. But I believe that will also very much be a fundamental reaction, because we are now in demand destruction mode — we need to see price levels that are actually reducing global energy demand. **Noah Brenner:** How much demand could be reined in, and what's the impact on balancing markets? And does demand destruction persist through the year, or come back quickly when supply returns? **Sindre Knutsson:** It will be quite immediate. Right now, countries — in particular Asian countries — that cannot afford paying the current premium and don't have the possibility to switch to alternative fuels will shut down activity. You've seen communication from South Asia, in particular Pakistan and Bangladesh — very price-sensitive nations — that if there are no alternatives, then activity levels, typically industry, need to shut down. But at the right price signals, those operations can resume, and the volumes will come back. It's also worth noting that the second volumes come back from Qatar — which these markets are relying on — they can continue to take those volumes, and they're priced very differently from the spot price you're seeing. Contracts with Qatar are typically under long-term arrangements indexed to Brent, which even at $90 per barrel will be a significant discount to current spot prices. So immediate demand response is likely to normalize when the flows come back. **Noah Brenner:** A few years ago we saw a similar setup — very cheap cargoes on long-term contract compared to a much higher spot price — which caused cargo cancellations or redirections. Have we seen that happen yet in this price run-up? **Sindre Knutsson:** The ones that cannot afford these cargoes will just stay out of the market. Europe is now impacted by an event that is mostly affecting Asian buyers — it's spilling over to Europe — whereas five years ago you saw a crisis in Europe spilling over to the LNG market. Europe will likely continue to attract volumes originally bought from the US, but will need to pay up. Most European imports are still sourced from the spot market, so when there's suddenly a lot of competition from Asian markets, Europe will have to pay up. And largely they're willing to do so — you've seen Bangladesh and Thailand paying up at $20 plus per MMBtu — but not everyone can afford that, which is why you'd see reduced activity and purchases in some markets. --- **[20:00]** **Noah Brenner:** Another dynamic is that European storage is very low — around 25–30%? **Sindre Knutsson:** Heading toward the mid-20s. And it's normal that storage levels are low this time of year because we've been through winter. But we are 10 percentage points lower than last year, given the cold winter Europe experienced. Very soon, Europe is going into summer, which is a season where Europe experiences a surplus of gas. That surplus needs to be injected into storage to prepare for the next winter. Storage levels being much lower than last year makes the job much harder over the next six months as Europe needs to refill to be prepared for potentially another cold winter. **Noah Brenner:** Is there an argument that Europe should have stocked up on LNG ahead of time? Could Europe have been more proactive in managing gas storage? **Sindre Knutsson:** Looking at the economics and how the curve looked last year, there were not great conditions in terms of the contango to refill into storage. Some countries included more government involvement to refill storage levels. You reached storage levels that were not quite at par with the target, but not too far from it. Looking at where you ended up — yes, you could argue Europe would have been in a better state if the storage target was met last year. But the decline we've seen this winter is market-driven and weather-driven. Even at roughly 25–30% after this winter, it's still within what you'd call normal levels. **Noah Brenner:** What about Russian gas? Is there a role for Russia here? Could we see relaxations of Europe's plans to ban Russian LNG — set for 2027 — or even a restart of additional pipeline supplies? **Sindre Knutsson:** The more likely outcome of the two is that you'd shift the schedule for banning Russian gas. Looking at the current schedule, short-term pipeline gas and energy sales are being banned this summer, but it's not until January 1st that LNG volumes are banned, and then end of 2027 for long-term pipeline agreements. This gives the EU enough time to reconsider what is happening in the market before taking a final decision. I'm sure the EU is monitoring this, but there's still no communication. It makes sense to hold back and monitor the situation a little further. Not likely as of now to see any changes, but the situation is being watched. As for bringing Russian pipeline gas back — that's much less likely. And even if there were appetite, it would take more time due to infrastructure damage. --- **[24:00]** **Noah Brenner:** Before this war broke out, Rystad Energy was writing about the rising importance of geostrategic LNG — supplies that can reach large consumers without transiting chokepoints like the Strait of Hormuz, Bab-el-Mandeb, the Red Sea, or even the Panama Canal. Does this closure of Hormuz create an opportunity for projects that don't have to travel through these chokepoints? **Sindre Knutsson:** Little did we know this would actually happen. The risk of seeing the Strait of Hormuz close — which by far has the biggest impact on the market — was already an extremely relevant topic, because removing these bottlenecks and risks makes the LNG market and security of supply much more transparent. I think it creates opportunities: if you're in Europe, it makes sense to source from the Atlantic Basin — whether that's North America, West Africa, or Norway — and avoid these kinds of risks. In Northeast Asia, looking into Australian and Southeast Asian supplies like Malaysia and Indonesia, or western Canada, reduces all of these risks. This may create opportunities for new projects and new regions, including Argentina, which is another potential source currently marketing volumes. You'll definitely see increased interest in cargoes and sources that avoid these so-called chokepoints. **Noah Brenner:** Could this push even more US projects across the finish line? We've already seen a massive wave of LNG projects coming online from the US over the next handful of years. **Sindre Knutsson:** It can. You've seen record-high investments in the US, including last year on the FID side. Even though the market conditions suggest a fairly large surplus coming into the market over the next year, this can create more momentum for US LNG. Of course, Europe is a natural market for US LNG, and you've seen a bit of a pause in European contracting of US LNG given the conversations around trade deals. But this puts US LNG in quite a favorable position — owning US LNG right now, at Henry Hub at around $3, plus the variable costs of liquefaction, shipping, your tolling fee and fixed costs, is very much in the money right now. **Noah Brenner:** How else could countries respond to this type of crisis? Do we see storage expand? Initiatives similar to an SPR for gas? **Sindre Knutsson:** On the gas side, you should have some strategic storage as backup. And the other key point — partly what we were discussing — is sourcing new LNG through new long-term contracts with a diversified supply base, making the market much less vulnerable to supply chain disruptions. You can really see the contrast right now between markets like China or Northeast Asia versus Europe. Countries with very diversified supply portfolios are managing much better. Japan, for example, has been over-contracted — they're not that exposed to Qatar right now, and they'll manage quite well across the board. China is also currently over-contracted. Looking at Europe, where still around 50–60% of LNG needs are contracted, a good way of closing that gap will be to contract more to secure supply. --- **[28:00]** **Noah Brenner:** Countries might say gas itself is not as reliable as energy produced within their borders. Do we see this second price spike in four or five years potentially incentivizing countries to invest more in renewables — or to get off gas? We saw Pakistan import an immense amount of Chinese solar panels after being badly affected by the 2022 gas crisis. **Sindre Knutsson:** If you go back, what took the biggest hit five years ago with the Russia-Ukraine war was pipeline gas — Russian volumes. Everyone then moved into the LNG market, viewing LNG as so much more flexible. There was a big push to build more regasification facilities and commit to more LNG. Now it's LNG's turn to take a hit, which — as you say — is making gas and LNG across the board less reliable. It's hurting the reputation of LNG, naturally. I would say it does push toward renewables — it did five years ago, and then you saw much more focus on renewables. We've since seen a comeback in oil and gas investment, also due to the underinvestment and higher cost of financing on the renewable side. More countries are seeing that security of supply — owning your source of energy production — is much more important. It depends on how long the current war and energy shock lasts, but all else equal, you are better off owning your energy source. Countries will still rely quite a lot on gas, but the current spike is not good for gas markets. It takes a hit on the reliability aspect — naturally. Those that are better off here, of course, are the ones exporting LNG and selling gas to market-place indexes not exposed to the Middle East on the production side — they're taking a short-term profit. But in the longer term, the industry is so much better off having much more stable gas prices, which demonstrates reliability and can drive more appetite for LNG in South Asia and across Asia. The current shock is not good for gas and LNG. **Noah Brenner:** Any parting thoughts, or anything we haven't talked about that we should? **Sindre Knutsson:** I think it's important to highlight the overall macro situation we are in, which is why things are a little different now versus what we saw five years ago. We talked about the risk premium — and as long as there are tensions in the region, despite seeing the war find a resolution, there's likely to be a small premium for a while. But gas prices are expected to come back to more normal levels whenever the war is over, perhaps with a small geopolitical risk premium versus what we've seen before. And when looking at the shift in balances — we've been saying the potential year of oversupply was 2027 and beyond. That year might now shift further into 2027 or even 2028. So there have been some structural changes in the balances. This will very much depend on how long or short-lived the current war and disruptions in the LNG market prove to be. **Noah Brenner:** We can only hope it's as short-lived as possible — both for those in the region experiencing the conflict firsthand, and for those around the world grappling with higher energy prices. Sindre, I know this market has been keeping you not just on your toes, but incredibly busy over the last week and a half or so. Thank you so much for making the time to join us. **Sindre Knutsson:** Thank you, Noah. --- **[32:00]** **Noah Brenner:** Let's recap. Gas prices have soared in the wake of the joint US-Israeli strikes on Iran and the closure of the Strait of Hormuz, but under our most likely scenarios, they will not reach the levels seen in 2022 following Russia's invasion of Ukraine. Nevertheless, restarting the gas fields and the liquefaction plants that they feed could take weeks, prolonging the impact on gas markets even after the strait reopens. This latest gas crisis could change the way countries think about securing energy supplies, pushing them to sign long-term contracts with diverse gas producers. But some could also look to decrease their reliance on gas altogether by developing other sources of energy such as renewables. Thanks for listening to *Let's Talk Energy*. This podcast is a production of Rystad Energy, produced by Lara Rodriguez Scow and Bota Oak. Check out the show notes for further analysis on the topics discussed in today's episode. Find us on social media — we're Rystad Energy on all major platforms. Please leave us a review, subscribe, and hit that like button. You can also keep up to date on our website, and if you'd like to send us a question or reflect on today's show, or have an idea for a future episode, email us directly at podcast@energy.com. Don't forget to join us next week for more *Let's Talk Energy*.