Strait of Hormuz crisis shifts LNG's biggest risk from supply to demand

Five months into the Strait of Hormuz crisis, the question still being asked is the obvious one: will the gas keep moving? It is not an idle question. When QatarEnergy declared force majeure in March, roughly one-fifth of the world's liquefied natural gas supply came off the market almost overnight. Last weekend brought the first sustained pause in hostilities in weeks, and oil promptly gave back much of its war premium. Yet the physical picture barely moved. The QatarEnergy-controlled Al Areesh transited out of the Strait of Hormuz on July 29, becoming the first LNG carrier recorded leaving the strait since July 11. QatarEnergy has begun extending force majeure notices into mid-October, and Asian spot prices remain at their highest levels in more than three years. Market attention has focused on cargo delays, shipping disruption and price. As always, the discussion centres on supply. But the real significance of this crisis lies elsewhere. It has exposed a much larger challenge for the LNG industry, one that extends well beyond a single waterway or a single war. The industry has entered a period in which supply risk and demand risk are rising at the same time. That is a situation LNG has rarely faced . For most of its modern history, the business rested on two assumptions. First, that once liquefaction capacity was built, supply could reliably reach global markets. Second, that demand would keep growing strongly enough to absorb it. Both assumptions are now in doubt. Supply's uneven recovery On supply, the record of the past five months is genuinely mixed. The International Energy Agency estimates that new production from North America and Africa, along with improved output from legacy producers, replaced about three-quarters of the lost Gulf deliveries between March and June. That is an impressive demonstration of the system's growth in capacity and consequent flexibility. It is also a reminder that the remaining quarter had nowhere to come from, and that a fifth of global supply still depends on 21 miles of contested water. A market can be well supplied and still be vulnerable. Even where cargoes ultimately arrive, repeated threats carry economic consequences. Shipping costs rise. Insurance premiums climb. Buyers who paid $10 per million British thermal units (MMBtu) in January have paid $20 to $22/MMBtu for much of July. Prices now move several per cent in a day on a single headline. Confidence erodes long before any molecule fails to arrive. Demand starts to shift At the same time, the crisis is quietly reshaping demand. Every geopolitical shock strengthens the case for alternatives. Governments concerned about energy security accelerate investment in renewables, electrification, storage and domestic resources. Or indeed choose to stick with coal. Industrial consumers seek control over energy costs. Utilities look to reduce exposure to imported fuels. Demand destruction rarely announces itself. It accumulates through thousands of decisions b