1. The Strait of Hormuz Is a Critical Pressure Point for Global Energy Markets

Roughly 20 million barrels of oil and 20% of the world’s LNG moves through the Strait of Hormuz each day, making it one of the world's most important energy transit routes. Ongoing disruptions are already impacting global oil and LNG markets.

2. Markets May Be Underestimating Long-Term Risk

Current pricing suggests markets expect a relatively short disruption. However, continued geopolitical uncertainty creates significant upside risk for oil, LNG, and power prices.

3. LNG Supply Constraints Are Creating Global Competition

With 100% of Qatar’s LNG restricted to the Gulf, along with the potential loss of a significant portion of Qatar's future export capacity, global inventories could continue to tighten. Europe and Asia may soon compete more aggressively for available LNG cargoes ahead of winter.

4. U.S. Energy Markets Are Not Reacting Uniformly

New England's power markets are seeing greater volatility due to reliance on winter LNG imports, while Texas markets continue benefiting from strong domestic natural gas production and lower regional prices. Volatility in PJM’s markets is impacted by the Middle East but are more affected by potential market reforms and the expectation that there is not enough supply to keep up with higher demand.

5. Energy Buyers Should Be Paying Attention Now

Despite the hostilities in the Persian Gulf, domestic natural gas prices are very attractive. Current market prices may not fully reflect the potential for prolonged disruption. For buyers with prompt summer and winter exposure, this could be an important opportunity to evaluate procurement and hedging strategies before volatility increases further.

Watch the Full Recording Below for Deeper Insights

The five points above are the through-line. The full webinar goes deeper on each: what the forward curve is actually pricing in, how the liquefied natural gas situation could reshape winter supply, and where the Northeast and Gulf Coast are diverging. Recording below.

Webinar Q&A

Q: What potential effect could China and Russia have on the conflict and energy markets?

A: China remains a major buyer of Iranian oil, but it's unclear how much supply they have stockpiled or whether they'll pressure Iran to reopen the Strait. Russia may benefit financially from higher oil prices, though its involvement is limited by the ongoing war in Ukraine. Overall, geopolitical pressure from China could influence the situation, but no major progress has occurred so far.

Q: What caused the spike in oil prices in 2022?

A: The Russia-Ukraine war disrupted global oil and natural gas flows, especially into Europe. Countries shifted away from Russian energy purchases, creating major supply and demand imbalances that pushed oil prices significantly higher.

Q: What effect is this having on U.S. power markets?

A: The impact varies significantly by region. Boston and New York power markets are closely tracking LNG volatility and have seen notable price increases. Meanwhile, ERCOT and Gulf Coast markets remain comparatively inexpensive due to abundant domestic gas production and strong market fundamentals.

Q: If the conflict continues, could ERCOT and other markets eventually react more like Boston and New York?

A: Yes. While ERCOT currently benefits from strong domestic natural gas supply and lower prices, a sustained rise in Henry Hub natural gas prices would eventually place upward pressure on all power markets. Northeastern markets remain the most exposed because of their reliance on LNG imports.

Q: What risks could impact domestic natural gas storage levels and push prices higher later this year?

A: Several factors could tighten storage and raise prices, including a hot summer that increases power demand, pipeline congestion in Texas, higher oil-driven gas production constraints, and continued global LNG demand. Analysts also noted that recession fears remain one of the few major bearish risks currently offsetting upward price pressure.

Q: How could Northeast pre-winter inventory builds and pricing trends evolve given the expected recovery time needed to return markets to normal conditions? Are there concerns about low regional inventories and elevated prices persisting into the fall or even year-end for liquid fuels and natural gas? 

A: East Region storage levels this year are fairly similar to this same time last year, so storage levels in the Northeast are not likely to be as impactful to this coming winter’s forward gas prices as forward LNG prices. Additionally, spot prices last winter were quite volatile in the Northeast, elevating the next winter’s prices even before LNG prices elevated in early March. We will likely need to see a full winter with less spot price volatility before premiums retreat.

Q: Several European countries, including Germany, Italy, France, and Spain, are considering or announcing the reopening or expanded use of nuclear and coal-fired power plants in response to the current energy situation. How feasible are these measures, and what impact could they have on regional energy prices? 

A: Reopening nuclear facilities and coal-fired plants, when feasible and cost effective, could provide some relief from the loss of imported LNG from the Middle East. However, we expect that any cost-effective options would have been pursued as a result of the Ukraine war and we would be surprised if there is additional nuclear and coal generation available, at least in the short term. Please note we have not reviewed the energy stack in Europe to confirm this.