Finally, the Gulf oil crisis has arrived

Author: Ye Zhen

Source: Wall Street Insights

The Strait of Hormuz is nearly blockaded, and the global energy market is being pushed toward what could be the most severe energy crisis since the 1970s!

On Monday’s open, oil prices surged sharply.

WTI crude futures temporarily jumped 22%, breaking the $110 mark; Brent crude futures also soared 20%, reaching $111.04 per barrel. The gains then slightly retreated.

Meanwhile, due to blocked oil exports and rapidly filling storage, more major Middle Eastern oil-producing countries are forced to announce production cuts.

As previously reported by Wall Street Insights, a wave of production cuts is rapidly spreading across the Gulf region.

Kuwait has officially declared force majeure and significantly reduced output; the UAE has also begun adjusting offshore production levels to ease storage pressure.

Goldman Sachs has directly “overturned” its earlier optimistic outlook, warning that: Actual flow through the Strait of Hormuz has fallen far more than expected. If it cannot be restored in the coming days, the upside risk to oil prices will significantly increase.

More critically, the intensity of this crisis has far exceeded initial assessments.

When Israel and the US launched their attacks, officials in Gulf countries generally believed that the situation would remain manageable and limited in escalation, as in previous conflicts.

But this time, a new variable unprecedented in history has been added—

Qatar has become the world’s largest LNG exporter.

When its core facilities cease production, it’s equivalent to nearly 20% of global LNG supply being suddenly cut off. The energy shock has thus rapidly spread from the oil market to the natural gas market.

As a result: natural gas prices in Europe and Asia are soaring in tandem.

Next, from chemical manufacturing in China to the Asian power industry, a series of chain reactions may occur.

The Hormuz crisis exceeds all expectations

The rapid escalation of the crisis caught the market off guard, largely due to initial misjudgments.

According to The Wall Street Journal, weeks before Israel and the US launched their attacks, Gulf oil officials were assured by the US that even if retaliatory actions occurred, targets would only be US military bases.

In other words, Iran would not attack Gulf energy facilities nor attempt to blockade the Strait of Hormuz.

After all, during the 12-day bombing of Iran by Israel and the US last June, the Strait of Hormuz remained open.

Therefore, when the attack actually happened, most officials remained optimistic.

Reports indicate that some officials even shared Mr. Bean’s middle finger meme in chat groups, comparing Iran’s possible retaliation to this clumsy comedy character.

OPEC held a meeting on the first Sunday after the attack, focusing on whether to increase production, with almost no serious discussion of Iran’s situation.

Until the situation rapidly spiraled out of control.

A senior Saudi official later admitted:

“We really didn’t expect Iran to strike the entire Gulf, completely disregarding our relations.”

Subsequently, a recording allegedly of an Iranian naval officer radioing ships not to enter the Strait of Hormuz spread quickly within industry WhatsApp groups.

Oil tanker flows immediately plummeted, and market sentiment instantly turned to panic.

Storage tanks are full, and a wave of production cuts is spreading

The near-blockade of the Strait of Hormuz quickly triggered a chain reaction among Middle Eastern oil producers.

The core reason is simple: storage space is nearly full.

Iraq was the first to be forced to cut production due to storage tanks nearing capacity, with reductions exceeding two-thirds.

Subsequently, Kuwait Petroleum officially declared force majeure.

According to Bloomberg, citing informed sources, Kuwait’s cut has expanded from about 100,000 barrels/day on Saturday to nearly 300,000 barrels/day, with further adjustments based on storage levels and the situation in the Strait.

In January this year, Kuwait’s daily output was about 2.57 million barrels, with the only export route being the Strait of Hormuz. If the strait remains blocked, its storage capacity could be exhausted within weeks or even days.

Abu Dhabi National Oil Company (Adnoc) also announced on Saturday that it is adjusting offshore production levels to meet storage needs.

As the third-largest OPEC oil producer, the UAE’s January daily output exceeded 3.5 million barrels.

Although Adnoc operates a pipeline to the Fujeirah port with a capacity of about 1.5 million barrels per day, bypassing the Strait of Hormuz to maintain some exports, this route cannot fully replace the transportation capacity of the strait.

JPMorgan estimates that if the strait remains closed through this Friday:

• Regional daily production could decline by over 4 million barrels
• By the end of March, the decline could approach 9 million barrels

This is nearly one-tenth of global demand.

Saudi Arabia has begun rerouting some crude through the Red Sea port of Yanbu.

But Goldman Sachs tracking data shows that over the past four days, net redirected flows through pipelines and alternative ports have only increased by about 900,000 barrels/day, far below the theoretical maximum of 3.6 million barrels/day.

Additionally, attacks on storage facilities at Fujeirah port and fuel shortages for ships further limit alternative export capacities.

Qatar LNG shutdown: a “new variable” in the crisis

Unlike any previous Middle Eastern energy conflict, Qatar has become the world’s largest LNG exporter.

This dependency, built over the past 20 years, has been fully amplified in this crisis.

After Iran’s drone attack on Qatar’s Ras Laffan Gas Complex, QatarEnergy announced on March 2nd that it would cease LNG production at the facility, citing force majeure.

Ras Laffan’s annual capacity is 77 million tons, accounting for about 20% of global LNG supply.

HSBC Global Research notes that the shutdown is not solely due to the strait blockade.

With cargoes unable to be exported, on-site storage tanks hold only about 1 million tons, less than five days of normal loading. In other words, QatarEnergy has no real choice but to halt production.

Market reactions were immediate.

European benchmark natural gas prices (TTF) surged about 70% over two trading days; Asian spot LNG prices (JKM) rose about 50%.

Both hit nearly three-year highs.

LNG tankers even staged a “cargo race” in open sea.

A vessel named Clean Mistral, en route to Spain, suddenly turned 90 degrees toward Asia, with several other ships making similar adjustments.

Re-starting production also takes time.

Reuters cites industry estimates:

• Ras Laffan’s restart itself requires about two weeks
• Full capacity recovery takes an additional two weeks

HSBC estimates:

• One month of shutdown could result in a loss of about 6.8 million tons of LNG
• Three months could lead to a loss of about 20.5 million tons

Considering that former President Trump indicated the Iran war might last four to five weeks, the market’s main scenario of supply loss is already close to 8 million tons.

The problem is that the global LNG market has almost no spare capacity.

The US, the world’s largest LNG exporter, has an estimated spare capacity of only about 5%; Norway reports its natural gas production is near full capacity; Australia’s spare capacity is similarly limited.

Goldman Sachs “Tearing Apart” Report: Rapidly Growing Upside Risks for Oil Prices

In a March 6 report, Goldman Sachs’ commodities research team nearly overturned its previous forecasts.

Goldman’s chief oil strategist Daan Struyven initially set a baseline scenario:

• Flow through the Strait of Hormuz would remain at about 15% over the next 5 days
• Then recover to 70% within two weeks
• And reach 100% in another two weeks

Based on this assumption, Goldman raised its Q2 Brent price forecast to $76, and WTI to $71.

But reality quickly shattered these assumptions.

Goldman’s latest estimate:

• Flow through the Strait of Hormuz has already fallen about 90%, reducing by roughly 18 million barrels/day

Actual redirected flows through alternative pipelines are only a quarter of the theoretical maximum.

Meanwhile, most shipowners are now waiting and watching.

The real obstacle to ships passing is not freight costs but physical safety risks—as long as the physical risks exist, ships will not pass regardless of high freight rates.

Goldman Sachs bluntly states in the report:

If there are no signs of solutions this week, oil prices are very likely to break $100 next week.

If the strait remains low throughout March, oil prices (especially refined products) could exceed the peaks of 2008 and 2022.

The report emphasizes:

Upside risks to oil prices are growing rapidly.

Energy historian Daniel Yergin also warns:

“This is the largest supply disruption in global history in terms of daily oil production. If it lasts for weeks, it will have profound impacts on the global economy.”

The US remains relatively insulated, but the impact is still spreading

US Energy Secretary Chris Wright said on Fox News Sunday that energy will soon resume flowing through the Strait of Hormuz, and believes that the oil price increase mainly reflects market concerns over the conflict’s duration.

Trump, aboard Air Force One, said he is not worried about gasoline prices and expects that after the war ends, oil prices will “drop very quickly”.

Compared to the 1970s, the US’s current energy structure is more resilient.

The oil and gas sector accounts for a smaller share of GDP, and the US has become a major energy exporter.

But the issue is—

Oil prices are set globally.

Rising retail prices for gasoline and diesel will still have tangible impacts on American consumers.

Airline executives have warned that soaring jet fuel prices will squeeze quarterly profits and could push up ticket prices.

Meanwhile, some US government measures conflict with existing policies.

To mitigate the impact of Gulf supply disruptions, the US Treasury has eased some sanctions on Russian crude oil, allowing countries like India to seek alternative supplies.

This directly contradicts previous efforts to isolate Russia’s oil industry.

According to HSBC and Morgan Stanley analyses, this energy shock has different effects across Eurasia.

For China’s chemical industry, it’s somewhat an opportunity.

Rising European natural gas prices have increased production costs for local chemical companies. HSBC Qianhai Securities notes this could lead to market share expansion and product premium opportunities for Chinese chemical firms (such as in MDI, TDI, vitamins, etc.).

In Asia, however, the situation is more severe—a real energy supply shortage.

Morgan Stanley points out that about 20% of Asia’s power and natural gas sectors depend on Middle Eastern LNG, with India, Thailand, and the Philippines being especially vulnerable.

To cope with fuel shortages and rising costs, some Asian countries have begun shifting back to coal-fired power to maintain grid stability.