Articles from 2012
What won't happen if the Straits of Hormuz are closed
- Written by Nick Grealy
- Published: 18 February 2012
Something immediately clear about energy traders is that they are overwhelmingly young.Trading is a business where if don't make enough money to retire after a few years,you probably got fired long before.
A story comes to mind as we see traders ramping up near term oil and LNG curves based on a risk premium stemming from perceptions that if the Straits of Hormuz are bottled up,so too will be the gas production of the largest LNG gas exporter Qatar.
I remember being on a plane from New York to London in early 1991 when we were woken half way over the Atlantic for the pilot to make an emotional announcement that the war to liberate Kuwait had started.That happened because this was a Kuwait Airways flight. Because of course, not all KA flights had been on the ground at home, leading to an airline in exile that kept on flying.That also made KA flights insanely cheap which explained my presence.
Similarly,today only a half dozen or less LNG tankers would be bottled up in the Gulf.
Traders gut reaction will be to ramp up prices as ruthlessly as they pumped up LNG even before the first waves hit the shore in Japan last March 11. Just as inevitably, some end users will panic and fix prices at the peak. In the UK, we can expect that Centrica and the rest will just as suddenly raise gas and power prices to domestic users.But the reality is that a couple of weeks later, cooler heads will prevail and here's why. First, a breakdown of LNG supply and demand from the International Gas Union:
Qatar obviously plays a dominant role in LNG. But world LNG trade is currently priced both on supply and demand of LNG, and tankers. The problem is not a shortge of gas but of shipping capacity. With 20 day voyage times from Qatar to some locations, the overwhelming majority of the fleet now tied up in the Qatar trade will be thousands of miles away from hostilities and actually could end up far closer to locations with spare capacity: Norway,Oman,Yemen, Peru, Equatorial Guinea, Algeria, Egypt and Trinidad will all be able to ramp up production to take advantage of freed up shipping capacity. Most of those locations are actually closer to Europe. It's hard to mention logic here in a market based on emotion, but logically we should also see a fall in both shipping rates per day and the number of days per voyage. They'll make some money for sure, but things won't be anywhere nears as bleak as traders try and make out. Perhaps I'm hard on traders.The reality is that if they are trying to scare people, they need willing victims and suckers are born every minute on the demand side here in Europe. Closing the Gulf could be potentially disastrous, but not necessarily catastrophic.The key advice is to resist the urge to give in to predictions.
I hope no one will ever need this advice,but it's even useful now for those considering buying on the curve. Don't get talked into scare scenarios by people with theoretical, not actual, experience.