The Iran war may end, but rebuilding Gulf energy will take years

Markets are focused on when the Iran war ends. They should be paying closer attention to what comes next

The hardest part of the Iran war may not be ending it. It may be rebuilding the Gulf energy system left behind.

The war has already reshaped how energy moves through the Gulf. Tankers have been rerouted, infrastructure damaged and inventories depleted. Reversing those changes could take years.

The International Energy Agency warned recently that more than 14 million barrels per day remain shut in and that full normalization of supply may not occur until 2027. Cumulative supply losses from Gulf oil producers now exceed one billion barrels.

Disruption to oil and gas flows through the Strait of Hormuz and attacks on energy infrastructure in the region represent what International Energy Agency head Fatih Birol has called “the greatest threat to global energy security in history.”

One reason recovery will take time is that global energy logistics cannot be switched on and off like a light.

During the conflict, very large crude carriers (VLCCs) that would normally pass through the Strait of Hormuz—a narrow waterway through which roughly one-fifth of the world’s oil supply passes—were sent elsewhere around the world. Getting those ships back where they belong could take two to three months. Shipping companies will also need convincing that the Persian Gulf is once again safe for business.

According to shipping analyst Yulia Zeng, rebuilding those tanker and shipping networks will take time. The vessels may still exist, but the routes, schedules and commercial relationships that keep oil moving efficiently have all been disrupted.

Energy infrastructure across the Gulf has suffered sustained damage. Repairs to Qatar’s Ras Laffan LNG plant, one of the world’s largest liquefied natural gas export facilities and a major supplier to Europe and Asia, are expected to take three to five years.

Infrastructure is only part of the challenge. The inventory cushion that protects the market from supply shocks is also shrinking.

Global crude inventories are being depleted at unprecedented rates, according to Helima Croft, head of commodity strategy at RBC Capital Markets. ExxonMobil Senior Vice-President Neil Chapman told the Bernstein 42nd Annual Strategic Decisions Conference that inventories remain one of the most important factors shaping the market.

“Well, first of all, the Saudis maxed out on their East-West pipeline. So, they’re running five million barrels a day of crude from the east to the Red Sea, and that obviously, you can get into the global market,” Chapman said. “I think what people appreciate less, there was a lot of sanctioned crude oil on the water. In other words, unsold Iranian, Venezuelan, Russian crude.”

That oil has largely gone to market and helped offset some of the losses through the Strait of Hormuz.

“Most importantly, commercial inventories of crude oil, of liquids-linked petroleum, gasoline, diesel, jet fuel, they’ve all run down,” Chapman said.

He warned that models suggest the world is approaching extraordinarily low inventory levels. Those inventories act as a buffer during supply disruptions. When they shrink, oil prices become far more vulnerable to sudden spikes.

Chevron chairman and CEO Mike Wirth has issued similar warnings. He says physical shortages are beginning to emerge and expects upward pressure on prices to grow as inventories continue to shrink.

Ben McMillan, chief investment officer at IDX Advisors, believes oil prices are unlikely to return to pre-war levels of US$60 per barrel. Even under the best-case scenario, he estimates it could take three to six months for supplies to recover. That alone suggests rebuilding the Gulf energy system will not happen quickly. The geopolitical risk premium created by the conflict could remain embedded in oil prices long after the shooting stops. In simple terms, buyers may continue paying more because of concerns that future disruptions could occur.

Let’s not fool ourselves. A ceasefire will eventually stop the fighting, but it will not instantly restore the Gulf energy system.

Toronto-based Rashid Husain Syed is a highly regarded analyst specializing in energy and politics, particularly in the Middle East. In addition to his contributions to local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. Organizations such as the Department of Energy in Washington and the International Energy Agency in Paris have sought his insights on global energy matters.