DJE Forum: Energy Markets Show Resilience Despite Mideast War Disruptions
Energy markets have shown resilience amid the Middle East conflict, with participants adapting mechanisms to mitigate the impact of supply disruptions, panelists said at the Dow Jones Energy Forum on Wednesday.
Despite the effective closure of the Strait of Hormuz, a key shipping chokepoint for oil and petroleum products, the market has found ways to rebalance through diversifying supply sources, inventory management, a transition towards renewables and alternative shipping arrangements.
Importers have established new trading relationships to secure products and plug supply gaps, resulting in the emergence of new trade flows, according to Vice President of Energy Markets & Feedstocks at Dow Jones Energy Adrian Calcaneo.
India, for example, has sought LPG supplies from the U.S. and Argentina, while new capacity expansions in the U.S. — such as the opening of Enterprise’s Neches River terminal in April — have helped plug supply gaps, he said.
India traditionally sources most of its LPG from the Middle East, making it one of the Asian markets most affected by the loss of Middle Eastern volumes amid the war.
Calcaneo also noted that countries have also ramped up domestic production to compensate for supply shortfalls. He cited the Indian government’s direction for refiners to maximize and prioritize LPG production.
Fairy Wang, vice president of Sinopec Economics and Development Research Institute, added that U.S. crude production increased during the war, rising to around 13.8 million barrels per day from around 13.3 million barrels per day before the conflict.
Major oil consumers, such as the U.S. and China, have also released strategic inventories during the crisis to mitigate supply disruptions, Wang said. U.S. Strategic Petroleum Reserve inventories fell from more than 400 million barrels to around 300 million barrels amid the crisis.
Wang also highlighted China’s earlier adoption of electric vehicles as a way to reduce oil demand, explaining that a focus on renewable energy could help shield the country from the impact of oil supply disruptions.
Beyond short-term measures such as increasing production and drawing on inventories, oil companies must also look at longer-term energy transition strategies to mitigate future risks, she said.
Steve Lewandowski, vice president and head of base chemicals at Dow Jones Energy, noted that the shipping sector has adapted by leaning on shadow fleets to maintain some oil flows through the Strait of Hormuz, although volumes remain below pre-war levels.
However, Lewandowski cautioned that despite the establishment of shadow fleets, other shipowners remain uncertain about entering the Strait until there is greater confidence in a peace agreement, limiting flows through the waterway.
Sinopec EDRI Associate Researcher Chen Zhang said the crisis has highlighted the importance of geopolitical considerations in oil companies’ decision-making, and companies will have to look beyond purely commercial considerations when assessing market risks.
Uncertainty and Concerns
Sources on the sidelines of the conference, however, continued to express uncertainty and raised concerns over the sustainability of some of these measures amid renewed U.S.-Iran tensions.
Some Asian LPG market sources highlighted that while new trade flows have emerged and the U.S. has stepped up as a key LPG supplier to Asia, El Nino-related drought risks could disrupt U.S. cargo flows to the region through the Panama Canal.
“While these alternatives have helped relief the supply crunch in Asia, the region continues to face supply tightness,”, one trader said.
“The market has indeed found ways to rebalance, but conditions remain volatile and are constantly evolving. Ramping up domestic production can provide short-term relief, but there is a need to focus on long-term strategies,” an analyst noted.
—Reporting by Chek Hoe Tan, chekhoe.tan@dowjones.com and Cheryl Lee, cheryl.lee@dowjones.com; Edited by Mei-Hwen Wong, mei-hwen.wong@dowjones.com