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Analysis: US-Iran tensions bring key Qatari LNG role into focus

London — The rising tensions between the US and Iran following the killing of top Iranian commander Qassem Soleimani in a US air strike in Baghdad on Friday brings into sharp focus the key role of nearby Qatar in the global gas market.

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Qatar supplied 22% of the world's LNG last year, so any possible disruption to its mainstay LNGexports would have a significant impact on the global gas market, analysts said Monday.

Qatar and the UAE -- both of which export LNG via the key Strait of Hormuz shipping channel in the Persian Gulf -- supplied an estimated 81 million mt of LNG to world markets last year, according to S&P Global Platts Analytics data.

Qatar supplied the majority -- 76 million mt -- which made up almost a quarter of the total global LNG supply last year of an estimated 348 million mt.

Qatar also is a key regional pipeline supplier of gas, sending up to 2 Bcf/d (57 million cu m/d) via the Dolphin pipeline to the UAE.

PRICE IMPACT

LNG analyst David Ledesma from the Oxford Institute for Energy Studies told S&P Global Platts that spot LNG prices could jump if the situation in the region worsened.

"Should tensions in the Middle East escalate, it is likely that spot Asian LNG prices would rise to reflect the concern that Middle Eastern LNG supply could be reduced if the Strait of Hormuz was closed or supply through the Strait limited," Ledesma said.

Further out, a sustained rise in oil prices would also eventually feed through to LNG contract prices later in 2020.

"A prolonged period of higher oil prices could translate into higher oil-indexed LNG contract prices, however the impact would not be immediate and would depend on the time lag determining the contractual reference price," Gergely Molnar from the International Energy Agency told Platts Monday.

Indeed, the immediate spot LNG price reaction from the killing of Soleimani has been muted.

The S&P Global Platts JKM price assessment for February was assessed at $5.35/MMBtu on Monday, up only slightly from the Friday assessment of $5.26/MMBtu.

Market participants also played down the impact on LNG.

"Qatar is friendly with both sides and is unlikely to be targeted," the head of LNG at a globaltrading house told Platts on Monday.

"Except in the event of a full blockade of the Strait of Hormuz, the issues are unlikely to have any significant impact on LNG flows. And any full blockade will be very much short-lived," he said.

In fact, he said, the crude price rally is bearish for LNG as some term contract holders will cancel cargoes and the global economy could suffer from higher oil prices.

The global gas market, he said, was still too long, which could see US LNG exports or Norwegianpipeline flows curtailed.

MARKET BALANCE

Analysts believe that even in the unlikely event of any disruption to Qatari LNG exports, the global gas market could cope.

"The LNG market is currently oversupplied; hence an interruption to LNG exports from Gulf countries, in the unlikely event such interruption should take place, can be balanced by supplies from outside the region and product in storage at import terminals over a period of weeks, if not months," Morten Frisch, head of UK-based Morten Frisch Consulting, said.

Platts Analytics said Monday it did not foresee either a closure of the Strait of Hormuz or an attack on Qatari export infrastructure.

But, it said, an interruption of the waterway would effectively place all of the combined export capacity of Qatar and the UAE under force majeure.

"This would wipe out some 320 million cu m/d of supply from our base case in Q1 or 21% of global liquefaction capacity," Platts Analytics analyst Luke Cottell said.

"A significant price response would be necessary to signal increased supply from underutilized global LNG facilities, European pipeline supply, as well as demand destruction," Cottell said.

Frisch said it would not be in Iran's long-term interest to disturb LNG shipping.

"If Iran should elect to disturb shipping operations, which it has demonstrated it has the capability to do, crude oil and petroleum product tankers are more likely to be the target," he said.

Frisch said the LNG shipping market itself could be impacted, though.

"The LNGC shipping market is tight. If a number of LNGCs should be trapped in the Gulf for any length of time this is likely to increase the current already high LNGC shipping rates substantially," he said.