What impact could the Middle East crisis have on the natural gas market?

The escalating conflict in the Middle East is keeping crude oil and natural gas markets on edge, with market participants concerned about potential cuts to regional oil, natural gas and LNG availability should tensions between Israel, Hezbollah and Iran escalate further. These geopolitical tensions come on top of ongoing uncertainty linked to the potential loss of European pipeline gas supply from Russia via Ukraine on 1 January 2025.  

In the natural gas market, Middle East concerns are primarily focused on:

1. The potential for a shut-in of Israeli gas production, which, if long-lasting, would not only have significant ramifications on Israel itself, but also regional LNG import markets, such as Egypt and Jordan, who are reliant on pipeline gas imports from the country.  
2. The disruption to critical supply routes, in particular the Strait of Hormuz, which is a key passage for nearly 20% of the world’s LNG supply. Since January, LNG vessels have been avoiding the Red Sea, so an escalation in shipping attacks around Bab El-Mandeb would have limited effect on LNG trade patterns.
3. An Israeli attack on the Tabriz-Ankara pipeline, which ships Iranian natural gas to Turkey could result in the latter switching to alternative sources of gas supply, such as Russian pipeline gas or LNG.

Of these three concerns, a disruption to Israeli gas production is most likely, given the closure of the Tamar field between 7 October-9 November 2023, as well as a brief halt to this field and the Leviathan earlier this month. Should a shutdown take place, we believe Israel would seek to minimise the downtime to avoid ramifications for its domestic economy and export markets in Egypt and Jordan. A more prolonged supply disruption would see Egypt and Jordan pushed into the LNG import market more, however the countries do not have enough spare LNG import capacity to fully displace Israeli pipeline gas for an extended period of time.

Kpler Insight views a long-lasting closure of the Strait of Hormuz as unlikely, given the significant ramifications for global oil and gas markets. Such a scenario would pose a considerable security of gas supply risk, particularly for Asian countries which rely on Qatar and UAE for over one-quarter of all LNG supply. Any action by Iran to close the passage is expected to be temporary as this would result in significant global pressure to re-open the passage in order to avoid a re-routing in trade flows and sustained oil and gas price spike. Closure of the strait could also impact the supply of Iranian crude to China, making it all the more unlikely.

On point three, in alignment with Kpler Insight’s short-term macroeconomic and crude oil outlook, we do not anticipate Iranian oil and gas infrastructure to be the primary target for Israel’s retaliation against Iran following its missile attack on Israeli soil in early October. Instead, Kpler Insight believes military compounds could be the focus, meaning disruption to Iranian pipeline gas exports to Turkey are unlikely.  

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Israel’s domestic market would suffer from a cut or halt in domestic production

Israel produces natural gas from three fields – Leviathan, Tamar and Karish. Gas from the fields supplies the domestic market, with volumes also exported via pipeline to Egypt and Jordan. Increasing exports to Egypt and Jordan is part of Israel’s strategy to solidify its position as a gas exporter in the region, driven by increasing output from the Tamar and Leviathan offshore fields.  

A prolonged shutdown of Israeli gas-producing fields would have significant ramifications on the domestic economy. Israel’s power and industrial sectors have become more reliant on gas in recent years, with the fuel having a 71% and 93% share in each sector, respectively. As a result, we expect Israel would only shut-in production if there was a real threat to its gas infrastructure and would seek to restart the production as soon as possible. In addition, contract obligations with Egypt and Jordan would likely oblige Israel to continue exporting gas to them, securing an important source of revenue.  

Israeli gas production shut-in would push Jordan and Egypt to import more LNG

A potential halt in Israeli offshore gas production has an indirect effect on the global gas market through Egypt and Jordan, which are increasingly reliant on Israel for gas supplies. This is particularly true for Egypt due to rapidly declining domestic gas production. Egypt’s gas production dropped to a seven-year low this summer, resulting in the country halting LNG exports and chartering the Hoegh Galleon FSRU to import LNG.  

Egypt has been increasing imports of pipeline gas from Israel via the East Mediterranean Gas pipeline since 2020. According to JODI, piped gas imports came in at 8.6 bcm in 2023, a 37% increase y/y and representing 13% of total gas supply. In the first seven months of this year, this volume has increased by 11% ytd to 5.9 bcm and representing 16% of Egypt’s total gas supply (see chart).  

Egypt’s annual natural gas supply by source (bcm)

Source: JODI, Kpler. 2024 values represent supply in the first seven months of the year.

If Israel curtails or shuts-in production due to increasing missile attacks, Egypt would need to pull more gas from the international LNG market to offset lost supply. Amid falling gas production (as discussed in the latest LNG monthly report), Egypt has no alternative supply options. A more immediate source of flexibility could come from demand destruction, in particular rationing gas supply to the power and industrial sectors.

Do Egypt and Jordan have sufficient LNG import capacity to replace Israeli gas imports?

Egypt and Jordan have a combined LNG import capacity of 9.5 mtpa – 5.7 mtpa via the Hoegh Galleon FSRU at Ain Sukhna and 3.8 mtpa via the Energos Eskimo FSRU at Aqaba in Jordan. Egypt can utilise LNG import capacity in Jordan based on a co-operation deal with the country lasting until 2025. Based on this available capacity, regional LNG imports can reach, on average, 0.8 mt (1.1 bcm) per month. This is equivalent to up to 12 full-sized conventional cargoes every month.

Focusing on Egypt, amid falling production, the country is already set to import 20 cargoes for Q4 delivery following the award of a buy tender in mid-September – this includes seven cargoes in October (0.48 mt or 0.65 bcm) and six cargoes per month in November and December (0.41 mt/month or 0.56 bcm/month). If Egypt fully utilises the Jordan FSRU too, spare LNG import capacity in November and December is under 50% (0.39 mt or 0.53 bcm).  

Despite the peak summer season drawing to a close, Egypt alone is expected to import at least 0.8 bcm of Israeli pipeline gas each month in Q4, based on historical imports and amid a tightening domestic balance. With spare LNG capacity at 0.53 bcm/month in the last two months of the year, the country would not be able to fully displace a prolonged cut in Israeli pipeline gas with LNG and thus would need cut gas demand to balance. Furthermore, this would leave Jordan with no LNG import capacity to displace its lost Israeli gas. As a result, even though peak cooling demand has come to an end, we see the region’s LNG import capacity as insufficient if a prolonged Israeli production shut-in takes place.

Egypt’s spare LNG import capacity vs assumed Israeli pipeline gas imports (bcm)

Source: Kpler Insight. Assumes Egypt fully utilises Jordan’s FSRU.

Strait of Hormuz unlikely to close due to importance for commodity exports

The Strait of Hormuz is a vital chokepoint for the commodities world. Vessels passing through the strait must traverse the territorial waters of Iran and Oman to reach international waters – posing risks that Iran could attack vessels or close the strait altogether.  

Qatar and the UAE are the two countries whose LNG exports transit the strait and thus would be most impacted by any potential closure or disruption on the supply side. In particular, LNG exports from Qatar would be heavily affected, with the country being the world’s third-largest LNG exporter at 79.8 mt in 2023 - 14 times the size of UAE exports at 5.4 mt.  

In 2023, 96% of the combined LNG exports from Qatar and the UAE transit the strait, which equated to 81.7 mt (or 20% of global LNG exports that year). The remaining 4% is imported into Kuwait. If the strait were to close, this would effectively remove 20% of the world’s LNG supply and would have unparalleled consequences, considering (unlike for the current disruptions in the Red Sea), there is no alternative route for Qatari and Emirati vessels to take, leaving them essentially stuck in the Persian Gulf.  

World LNG exports in 2023 (mt)*:

Source: Kpler . * Excluding Qatari and UAE volumes delivered into Kuwait.

Converting this on a daily basis, this would equate to a theoretical loss of 224kt of LNG per day (equating to 3.2 conventional-sized cargoes). Some of the gas could potentially be re-routed via the Dolphin Gas pipeline which connects Qatar to Oman and the Qalhat LNG terminal. However, the volume of supply would be very small, and it is unclear if this pipeline has spare capacity. In addition, use of this pipeline would entail intense negotiations with other regional players, making it a highly implausible solution.

Asian countries rely on Qatar for 24% of their imports in 2023, while for European nations it is lower dependence at 12%. If we add the UAE’s volumes, a closure of the strait would translate to a combined 26% reliance from Asia and 12% of European supply being potentially disrupted. This would be too much of a risk to bear for these two demand basins, and the effects on prices would be unprecedented. Furthermore, considering the fact that the impact would directly affect over 20 importing countries makes the stakes all too high to risk a closure of the strait. The conclusion is similar for other commodities as well (especially for liquids and refined products), with countries like Iran, Iraq and Saudi Arabia also impacted on the export side. Some vital trade routes like Iranian crude to China make it all the more unlikely for a closure of the strait.

Asian LNG imports split by supplier country in 2023 (mt):

Source: Kpler Insight

European LNG imports split by supplier country in 2023 (mt):

Source: Kpler Insight

Kuwait is the only country that relies on vessels transiting via the Hormuz Strait for its LNG imports. Indeed, in 2023, 44% of its imports had to pass the strait, while the remaining 56% was supplied by Qatar. These Qatari volumes are sourced as part of an existing 3 mtpa contract between Qatargas and KPC, so the latter relies on non-Qatari volumes during peak cooling season. In theory, were the Hormuz strait to close, Kuwait could easily switch to only local LNG supply from Qatar/UAE (who would have an abundance of spare cargoes). However, Kuwait does not have the demand for all of this supply, meaning a shut-in of LNG production would be necessary.  

All in all, Kpler Insight maintains that a closure of the Hormuz Strait remains extremely unlikely, due to the significant disruptions to global trade and prices it would have. 20% of global LNG exports would be impacted, the vast majority of it coming from Qatar. A multitude of buyers spread across Europe and Asia would also be heavily impacted, including major price-sensitive players. Therefore, no major producer or buyer would benefit from a closure of the Strait.  

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