Middle East Conflict Disrupts Global LNG Markets

The ongoing conflice in the Middle East has caused significant disruption to global energy flows, with particular concern regarding liquefied natural gas. While crude oil receives substantial attention due to its volatility, analysts argue that the situation facing the liquefied gas sector is arguably more severe and warrants closer scrutiny. There are growing fears that this conflict could fundamentally reshape the long-term outlook for the commodity.

Shell released a forecast at the end of June projecting annual LNG demand reaching close to 700 million tons by 2050, representing an increase of approximately 65 per cent from 2025 levels. This projection assumes that nations continue to prioritise flexible and reliable energy security offered by gas. However, recent events have demonstrated the limits of this flexibility. The conflict prompted a force majeure declaration for Qatar’s largest single liquefaction hub, effectively slowing exports from the Persian Gulf to a trickle.

Despite these supply constraints, energy importers remain prepared to pay substantial premiums to secure available cargoes as seasonal demand peaks in the northern hemisphere. Since January, LNG prices have doubled. Buyers who paid ten dollars per million British thermal units in January faced costs between 20 and 22 dollars during much of July. This price surge has led to what is described as demand destruction by high prices. Consequently, countries such as Pakistan have resorted to cranking up coal power plants to replace expensive liquefied gas imports.

Japan, the world’s second-largest LNG importer, has similarly increased reliance on its domestic coal reserves. Europe faces challenges in refilling its gas storage facilities due to elevated LNG costs. According to Gas Strategies, global demand for LNG could dip by eight per cent this year if flows from the Persian Gulf remain subdued throughout 2025. The likelihood of this scenario materialising appears significant given recent attacks on LNG carriers in the Strait of Hormuz. With peace talks between the United States and Iran reportedly taking place only in media reports rather than reality, analysts suggest that pressure on energy trade will extend and deepen.

Not all regions are equally vulnerable to these disruptions. China sharply reduced its LNG purchases during the second quarter but has since seen imports rebound as electricity demand rose with temperatures while domestic production slid lower. At the end of June, Kpler reported that China was stepping up liquefied gas purchases. This position is viewed as advantageous compared to members of the European Union, who rely on both pipeline and ship-borne supplies from Russia before a ban comes into effect at the start of 2027.

The reduction in demand from Europe could theoretically free more liquefied gas for other buyers such as China. This might redirect trade towards major exporters like Australia and the United States, which is already the largest exporter and building new capacity. While additional supply should theoretically lower prices, the war premium generated by the closure of Hormuz and attacks on vessels suggests these costs will remain sizable in practice.

Pat Breen, chief executive of Gas Strategies, suggests that while short-term supply remains tight, this situation may change next year. This could force producers to consider expansion plans, with some 207 million tons of new annual capacity expected by 2030. However, it is unclear whether sufficient buyers will exist for such volumes. Historical commodity cycles suggest that demand inevitably rises when prices fall, regardless of the rush towards alternative electricity generation from wind and solar sources. Gas remains attractive because it generates on-demand electricity and can be stored for more than a couple of hours.