Oil is abundant, perhaps too much so

As the war in Iran continues, storage facilities across the Middle East are filling up, putting great short-term stress on the global energy supply chain. Most Middle Eastern storage is designed for short-term operational needs rather than long-term “trading” storage. As such, countries such as Kuwait, Saudi Arabia, the UAE, Qatar, Oman, Bahrain and Iraq all face constraints. If they can’t ship it, they must store it. And if they can’t store it either, they must halt production.

Iraq, the UAE, Kuwait and now Saudi Arabia have begun cutting production due to limited space. Saudia Arabia, typically a “last resort” supplier, was expected to cut last — but it is approaching its own limits and has begun to reduce its output. The country’s international storage options (in South Africa, Korea and Japan) are not large enough to materially change the picture. 

Understanding the shut-ins

Energy companies avoid closing wells because restarting them is difficult and risks pressure loss. Once a well is closed, it typically takes two weeks to return to operation and one month to return to full output. As a result, shut-ins essentially function as negative inventory, with early estimates suggesting that: 

• In the first four to five days of the shut in at the end of last week (March 7), roughly 250 million barrels of oil were lost.
• A two-week shutdown could remove around 450 million barrels — equivalent to the size of the current US Strategic Petroleum Reserve. 

In response to the mounting supply disruption and following an International Energy Agency (IEA) recommendation, member countries agreed to the release from their reserves of 400 million barrels of oil — the largest such release in history — to curb higher prices. While a daily cadence is still to be determined, it is expected to help alleviate supply anxiety.  

Refined products and LNG under pressure

Refined product prices are already moving higher — diesel, jet fuel and bitumen have all risen, with Europe and Asia seeing the largest increases.

Liquefied natural gas (LNG) is also at risk. Qatar, one of the world's largest producers of LNG, has shut down its main facility and may take more than a month to return to normal operations. Qatar provides around 20% of global supply.

According to the US Energy Information Administration (EIA), more than four-fifths of the oil and LNG transported through the Strait of Hormuz go to Asia. As a result, China, India, Japan and South Korea will be competing for tightening supplies, although China had already been stockpiling.

Europe, meanwhile, has still not sufficiently prepared despite the wake-up call offered by the start of the Ukraine war four years ago. Gas storage levels remain inadequate: European natural gas storage dipped below 30% in late February, below the 15-year average of 42%.  With the refill season beginning in late March, Europe will be refilling at higher prices. Countries with minimal storage, like the UK (roughly 12 days’ worth of storage), are particularly exposed compared with other European countries like Germany (90 days) and France (100+). The US is Europe’s largest supplier of LNG, but Qatar, Russia, Algeria, and Nigeria also figure largely. US production is already near full capacity, so there’s not a lot of help to be sought there. With Qatari supply now on hold and Russia threatening to shift exports to Asia, Europe faces steep prices for natural gas.    

Power markets

Power prices are rising sharply in Europe, especially in the UK and Germany, where natural gas sets the marginal price of power. European gas prices have surged roughly 60% since the start of the conflict. 

If outright shortages develop, the risk of energy rationing increases, with impacts likely felt in this order: industrials first, followed by power generators, and then consumers.

Conclusion

Limited storage capacity, together with the import needs of major economies in Europe and Asia, shapes the current economic impact of the war. This problem is only likely to get worse until the Strait of Hormuz reopens or the war ends. The duration of the conflict is the key factor in determining the investment implications. A quicker resolution to the conflict and a revival of crude and natural gas exports greatly benefits Europe and Japan.