There is another energy market that could be more affected than oil by the closure of the Strait of Hormuz

Oil prices rose on Monday with traffic in the Strait of Hormuz at a near standstill, but the long-term implications of the Strait’s closure may be more extreme for the liquefied natural gas market. This is partly because it is more difficult to transport than crude oil and LNG production is more concentrated.

About 20% of the world’s LNG flows through the Strait (most of which is exported from Qatar) and global gas prices are rising after the country halted production last week following an Iranian drone attack.

European natural gas rose 63% last week, its biggest percentage increase since March 2022, following the Russian invasion of Ukraine. Prices in Asia are even higher (trading at $23.40/mmbtu on Monday morning) given the majority of LNG flows from Qatar to Asia. Asian nations are trying to make up for lost cargoes, and as sharing between European and Asian gas expands, some LNG vessels originally headed to Europe are now making a U-turn and heading to Asia instead.

Some crude oil from Saudi Arabia and the United Arab Emirates has been diverted through pipelines, but the same infrastructure does not exist for gas. In other words, you need a boat to transport it over long distances.

And while many Middle Eastern states produce oil, gas production is concentrated in an industrial complex in Qatar, making the market much more vulnerable in the future, said Alex Munton, director of global gas and LNG research at Rapidan Energy.

The real risk, Munton said, is how difficult it will be to restart Qatar’s LNG production in Ras Laffan once traffic in the Strait resumes. Given the complexities of cooling gas, which is fundamentally an industrial process, restarting it will take much longer than oil production.

Rapidan predicts that LNG exports from the region will not begin again until there is 100% certainty that it is safe for ships to transit the Strait. Insurance is a factor (an LNG tanker can cost $250 million), but the complexity of the process means operations cannot scale up or down based on perceived escalations or de-escalations. It will also take weeks, rather than days, to fully restart operations, according to the company, which added that the entire plant has never been taken offline before.

“I don’t think in the early days of this conflict – we’re only a week into it – there’s an appreciation of how long Qatar will be offline and the effect that will have on global supply and global markets,” Munton told CNBC.

The United States is the world’s largest exporter of LNG, but production is essentially running at maximum capacity. And with little additional production available around the world, demand destruction is what could ultimately balance the market. That could include switching from gas to relatively cheap coal, for example.

But Munton said an escalation of hostilities, including additional attacks on Qatar’s LNG infrastructure, could lead to larger long-term ramifications. Rapidan’s view is that Iran’s previous attacks on Ras Laffan were a “warning shot that was not real.”

“It’s an easy target,” Munton said of the industrial complex. “If Iran wanted to cause significant damage to Qatar’s LNG capacity, it could… There is no way to fully defend against an Iranian attack if Iran were hell-bent on damaging the plant.”

“It’s not like one node can absorb all the oil production in the Middle East, because there are too many fields, too many countries, too many plants and facilities… but with LNG it’s one facility. It’s a gigantic complex, but it’s just one facility.”

QatarEnergy is now delaying the expansion of its gas facilities until 2027, according to Bloomberg.