Why LNG Reserves Are the Bigger Risk

The oil price has fluctuated wildly, between $70-120 a barrel during the past two weeks, and shot up again despite the IEA announcing release of oil from strategic reserves. Why such extreme volatility?

Two weeks into the war, Iran’s government has remained viable despite the loss of its leader, has taken the war to several countries across the region and has succeeded in choking off a fifth of the world’s flow of oil and gas. The visuals on TV of burning oil tankers and so on are quite dramatic. The oil markets are alarmed that the war could be a protracted one and hyper-sensitive to every development, positive and negative.

The IEA’s move to assuage markets by releasing oil from reserves is understandable but it was a moot point whether that would help at this stage. The markets are reacting out of fear more than any evaluation of supply and demand.

Kharg Island and the Persian Gulf.

The major consuming economies have sufficient reserves to last several weeks — in addition to the IEA’s reserves, itself sufficient to cater for close to two months’ disruption of Persian Gulf supply, major countries have their own stocks. China is believed to maintain over 100 days’ worth of consumption, Japan over 250 days’ worth, the EU 90 days’ worth of imports and India 74 days’ worth.

Actually, the position of natural gas reserves should perhaps be of greater immediate concern, but is receiving less attention. European gas reserves are at typically low winter-end levels, and their refilling for the next season — already impaired by reduced Russian supplies — is hampered by loss of Qatari and Emirati LNG supply. While China and Japan maintain substantial strategic LNG reserves as a matter of policy, it is not clear what the actual position at Indian LNG terminals is.

Spot LNG prices have shot up above $15/ MMBtu (Metric Million British Thermal Unit) in Asia and Europe, an over 50% increase in two weeks.

Iran has succeeded in blocking the Strait of Hormuz despite the overwhelming military superiority of the US. What is the likely course of the conflict now?

We do not know what the US and Israel had planned and I am certainly not a military expert, but the maxim of Field Marshal von Moltke the Elder comes to mind, that “no plan of war provides certainty beyond the first encounter with the enemy.”

Uncertainty is inherent in the very nature of war, and the weaker power can take to unconventional means as Iran, using drones and the geography of the Strait of Hormuz, is doing. It has weaponised the oil price which it hopes will lead to politically damaging economic distress in the US.

In a sense, this war started in June 2025 when Israel found it possible to strike Iranian nuclear installations. Having now started the war, it is unlikely that Israel and the US will stop until their basic aim — of permanently neutralising Iran as a serious military threat — is achieved. The survival or otherwise of the regime is of less consequence to them than the destruction of its capability to wage war. They will continue to degrade Iran’s long-range missile and drone capability which, as of now, is far from being achieved. A sufficiently large number of drones are hitting targets on land and at sea to cause chaos, despite a majority reportedly being shot down.

 The best-case scenario is that the two sides come to terms whereby Iran changes its policies vis-a-vis the US and Israel toward co-existence and economic cooperation. The worst-case scenario is that the war has no clear result, drags on beyond early April, adequate anti-drone defence cannot be assured and a defiant Iran, even if much enfeebled or politically fragmented, continues to harass shipping, oil and gas production, and life across the region. That would be a tragic prospect if it comes to pass, in a vitally sensitive part of the world, serving neither the long-suffering people of Iran nor the world at large.

The US and Israel have not attacked Iran’s main oil export facility at Kharg Island. What explains that?

You raise a significant point — one that is a cause for hope. No major Iranian oil and gas production, refining or export facility has thus far been attacked [three depots and one refinery near Tehran have been hit].

I believe it is a deliberate measure in the interest of stabilising the oil price. It is partly a signal to Iran to reciprocate by refraining from attacking other countries’ facilities — which it has so far rebuffed. It is partly also a measure to keep the Iranian people on side in the days after the war, as Iran’s ability to produce and export oil and gas will be the foundation on which its economy can be revived.

Can shipping through the Strait of Hormuz be resumed even if the war continues?

Considering the importance of the strait to the world economy, a solution will simply have to be found even if, unfortunately, at high cost. None of the major economies of the world can tolerate an indefinite closure of the strait.

A need may arise for nations to get together to dispatch their merchant fleets escorted by their navies to the Gulf, even as diplomatic efforts toward peace continue. The real test will be passage of ships through the Strait relatively unmolested, under naval escort or otherwise. Anti-drone technology — both aerial and underwater — which is still nascent, would have to be adapted and deployed on merchant and war ships on a large scale.

Much has been said about the difficulty of finding insurance cover and its cost. In a situation where the stakes are high, sovereign states may have to step in to indemnify parties not just against loss of life and assets, but also against environmental damage.