The Economist | Even in the best-case scenario for energy markets, it will still be a disaster

Why does the energy market still take months to recover after the reopening of the Strait of Hormuz?

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No matter how the situation develops, high energy prices will last longer than the Iran conflict.

The third Gulf War has now entered its fourth week. As long as Iran’s attacks on ships keep the Strait of Hormuz closed, about one-fifth of the world’s oil and liquefied natural gas production will remain stranded there. That means each day, traders update how much supply has been lost this year. As their estimates keep rising, energy prices also climb. Brent crude oil has now risen to $112 per barrel, up 54% from before the conflict began. European natural gas prices have increased by 85%.

The reason prices haven’t risen even higher is that investors expect supply to recover soon. Data from Société Générale shows that in contracts for delivery from July onward, put options betting on falling prices outnumber call options betting on rising prices (see Chart 1). In other words, considering transportation delays, investors expect the market to return to normal by May.

Chart source: The Economist

To assess whether this expectation is realistic, The Economist calculated: if the war ends today, how long will it take for the market to normalize? Even if Iran accepts Donald Trump’s threat issued on March 21 to strike its power plants if the Strait isn’t reopened within 48 hours—which is a big assumption—the global oil and natural gas markets will remain tight for months, dragging down the world economy.

Three things must happen for the energy market to balance after the Strait of Hormuz reopens. First, Gulf oil producers must restore output to pre-war levels. Second, ships must transport this output to overseas refineries. Third, these refineries must process it into usable fuels. Each link in this industrial relay takes time.

Starting with production: due to inability to export and limited storage capacity, Gulf countries have cut their combined daily crude output by 10 million barrels, about 40% of their pre-war levels (see Chart 2). To bring these capacities back online, producers must first check whether facilities are still operational and clear pipeline blockages. Only then can they restart oil wells by restoring pressure, which must be done gradually to avoid damaging reservoirs. Additional time is needed to restart separators, compressors, and processing plants involved in initial handling.

Chart source: The Economist

Although Gulf OPEC members are accustomed to adjusting production within days, this time the cuts are more sudden and deeper than before. Industry experts estimate that completing all this will take two to four weeks.

Natural gas seems even more complicated. Qatar’s Ras Laffan facility supplies nearly 20% of the world’s liquefied natural gas (LNG) and has been shut since March 2 after an Iranian drone attack. Last week, a missile strike severely damaged two of its 14 liquefaction units, which account for 17% of its total capacity and about 3% of global supply. Qatar’s energy minister said repairs will take three to five years, delaying expansion plans. The extent of damage to other facilities remains unclear, but even lightly damaged ones will likely need weeks of repairs to resume operation.

Restoration is just the beginning. Afterwards, water must be drained from equipment to prevent pipeline cracking when cooled to -160°C. Rushing this process can cause uneven metal contraction and weld fractures. Anne-Sophie Corbeau of Columbia University estimates this entire process could take up to seven weeks.

Next is shipping. If a ceasefire is reached, most of the approximately 480 ships stranded in the Gulf will likely want to see several days of no attacks before attempting to leave. Most tankers are already loaded, and the Strait can handle high traffic, so congestion could clear within two weeks. Theoretically, new ships could then enter to transport gradually resuming oil and gas production.

But in reality, few ships may be willing to do so in the coming weeks. Iran has attacked ports across the Gulf, targeting fuel tanks, warehouses, and anchored ships. While most port terminals appear intact, some damage may not be publicly disclosed. John Ollett of Argus Media notes that clearing sunken ships or damaged infrastructure may be necessary for safe navigation, which can take months to repair.

Additionally, most war risk insurance policies in the region have been canceled. Insurers willing to provide coverage have increased premiums from 0.2-0.4% of vessel value to 1% or higher, with the riskiest voyages costing up to 10%. Anyone with internet access can find ship owner or charterer details, meaning ships linked to Iran or hostile parties could become targets if tensions escalate again. Ellis Morley of Howden says insurers are unlikely to lower premiums quickly.

Even if insurance supplies are restored and prices become affordable, ship owners and operators may hesitate to return to these routes immediately. Although Houthi rebels officially ended their two-year Red Sea campaign last November, targeting Western-aligned ships, the number of tankers willing to risk passing through remains about half of 2023 levels, and LNG carriers are almost entirely avoiding the route. The market remains uncertain whether Iran-backed Houthi forces will keep their promises.

Further delays stem from the current positioning of the global fleet. After the conflict erupted, supertankers that usually transport Middle Eastern oil to Asia shifted to the Atlantic seeking business. Once the Strait reopens, many ships will likely complete their current voyages—loading in the Americas and unloading in China—before returning to the Gulf (see Chart 3). Andrew Wilson of BSR brokerage estimates such round trips typically take up to 90 days.

Even if Gulf oil eventually reaches distant refineries, it won’t immediately ease fuel shortages. Some refineries in China, India, Malaysia, and Thailand have shut down entirely due to lack of raw materials. Asia’s refinery throughput has fallen by 3 million barrels per day, about 8%. Restoring supply to these plants will take weeks once Gulf oil flows again. Ajay Parmar, a former engineer at TotalEnergies, notes that restarting after an emergency shutdown often takes months. Like upstream facilities, downstream refineries require thorough inspection, pipeline clearing, and gradual reactivation of power, steam, cooling, and compression systems. LNG regasification plants face similar challenges.

Chart source: The Economist

Therefore, even if Trump and Iran reach a ceasefire tomorrow, it could still take four months for the market to return to near-normal conditions. Other producers cannot ramp up output quickly enough to compensate for previous losses. As a result, this year’s global oil production will be about 3% lower than planned. Each additional month of Ras Laffan’s shutdown reduces global LNG supply by roughly 7 million tons—close to 2% of annual projected supply. Moreover, Qatar’s future full capacity will remain below pre-war levels, and even if Qatar resumes current recoverable capacity today, this year’s output will still be 4% below demand.

The impact is severe. Global oil inventories, which were expected to be one-third below their historical range by the end of March, will continue to decline in the following weeks even after the Strait reopens. Countries with weaker buffers risk panic buying and price spikes once inventories run out. The same applies to LNG bidding wars. Ashley Sherman of Vortexa states that the last few cargoes from Qatar before the Strait closed will arrive in Asia and Europe within days. After that, buyers will either seek alternative supplies or face shortages, threatening efforts to stockpile for winter (see Chart 4).

Chart source: The Economist

Oil and gas traders are still betting on a miracle in spring. The world is praying for it. But even if Trump and Iran’s Ayatollahs fulfill this wish, the logistics of oil and gas won’t easily return to normal. The energy market will remain under the shadow of this conflict until deep into the Northern Hemisphere winter.