Middle East conflict: From short‑term shock to structural energy market risk

Shifting market sentiment as the conflict expands

Since 28 February, the Middle East has shifted from a brief escalation into a drawn‑out conflict that is reshaping global energy markets. What initially looked like a short-lived flare up has widened into a multi‑layered confrontation involving state forces, regional militias and repeated disruptions around key energy and shipping infrastructure. Over the past month reporting from major outlets has shown a steady rise in geopolitical tension and markets have been forced to adjust.

In the early stages traders treated the situation as temporary. Oil and gas prices reacted but not dramatically and the assumption was that the region would stabilise. That view faded through March as the conflict spread across several fronts, with drone and missile activity having increased in the Gulf, shipping incidents were confirmed and military deployments expanded. By the middle of March, it was clear the region was entering a longer period of instability and the market tone shifted with it.

Oil and gas markets reprice geopolitical risk

Brent crude, which had been sitting in the mid $70s, began climbing as the risk of supply disruption became harder to ignore. Through March and early April prices pushed higher, with several sessions marked by sharp intraday swings whenever new strikes, tanker incidents or sanctions discussions were reported. Even without direct damage to major export facilities the vulnerability of the region’s infrastructure, especially around the Strait of Hormuz, is enough to keep a risk premium in the market.

Gas markets followed. European hubs such as TTF and NBP saw steady upward pressure as geopolitical risk layered on top of regional fundamentals. Unplanned Norwegian outages, late‑season storage withdrawals, and weather revisions all played a part, but the Middle East backdrop amplified every move. LNG markets also tightened with the JKM benchmark rising as shipping risk increased and insurers reassessed exposure to Gulf transit routes. Qatar and the UAE rely heavily on Hormuz for LNG exports so any perceived threat to the strait feeds directly into gas pricing.

The Strait of Hormuz and limits to mitigation

The Strait of Hormuz remains the central pressure point in the region. In normal conditions around 20 million barrels per day of crude and condensate move through the strait, equal to roughly a fifth of global petroleum liquids consumption. For most Gulf producers there is no practical seaborne alternative. Iran, Iraq, Kuwait, Qatar, and Bahrain rely almost entirely on Hormuz to reach the open ocean. Saudi Arabia and the UAE are the only major exporters with meaningful bypass options via pipeline, and even these are limited relative to normal flows.

To compensate for the disruption, regional producers have increased use of the overland pipelines that avoid Hormuz. Saudi Arabia has raised throughput on its East‑West (Petroline) system to the Red Sea port of Yanbu. The line has a nameplate capacity of around 7 million barrels per day, and recent utilisation has moved sharply higher. The UAE has also increased exports through the Habshan–Fujairah pipeline, which links onshore fields to the port of Fujairah on the Gulf of Oman, operating close to its 1.8 million barrels per day maximum.

Taken together, these and other regional pipelines provide around 7–8 million barrels per day of theoretical bypass capacity under ideal conditions. This is significantly higher than the 3.5–5.5 million barrels per day cited by the IEA under normal operating assumptions, but still well short of the roughly 20 million barrels per day that typically move through the strait. Even with pipelines running near maximum, only a portion of Gulf exports can be rerouted, leaving Hormuz as the unavoidable chokepoint for the majority of regional crude and LNG flows.

Shipping disruption and operational consequences

At the same time some shipping has diverted around the Cape of Good Hope to avoid Red Sea and Bab el‑Mandeb risks. This adds considerable time and cost to voyages but can reduce exposure to missile and drone attacks in the Red Sea corridor. However, for Gulf exports that originate inside the Persian Gulf the Cape route does not solve the core problem. Tankers still need to exit through Hormuz before they can head south around Africa. For most producers in the region the strait remains unavoidable unless volumes are shifted into the limited pipeline network.

The conflict has also reached critical energy infrastructure. In late March and early April multiple attacks were reported on facilities linked to the Ras Laffan industrial complex in Qatar, the world’s largest LNG export hub. Separate incidents were also reported around South Pars/North Dome, the shared Iran–Qatar gas field that underpins both countries’ LNG and gas production.

QatarEnergy has confirmed that two LNG trains were impacted and that repairs could take three to five years. That timeline reflects the complexity of LNG liquefaction equipment and the global shortage of specialised components. Even partial outages at Ras Laffan have long-term implications for global LNG supply given Qatar’s central role in the market and its ongoing expansion programme.

These developments have had clear operational effects:

•  Freight rates have risen as insurance costs climb
• Some vessels have rerouted which adds days or weeks to delivery times
• Vessels unable to travel through Strait - limited amount have gone through, albeit ships deemed 'non-hostile'
• Spot LNG and crude cargoes have become more volatile
• LNG supply expectations for the late 2020s have been revised due to the Ras Laffan damage

Political developments and market reaction

The geopolitical backdrop has continued to intensify over the past week following a series of new public warnings from President Donald Trump directed at Iran. Energy markets reacted quickly to these statements on 07 April, with crude futures moving higher during the session, after which the comments were released, whilst gas and power also lifted. The tone of the remarks added to the sense that the conflict is entering a more unpredictable phase. However, following Trump's ultimatum for his demands not being by 01:00AM BST, a conditional two-week ceasefire between the US and Iran has been agreed, reopening the Strait of Hormuz under Iranian military coordination after weeks of escalating confrontation. The US are to pause strikes during this period, while Iran has issued a 10‑point list of political and economic demands and reiterated that it does not seek nuclear weapons. Pakistan has acted as mediator and will host talks aimed at securing a permanent longer‑term deal. Israel has backed only the narrow elements related to Hormuz and continues operations in Lebanon. Despite the announcement, tensions remain high, with missile alerts reported shortly afterward and clear differences in how each side interprets the truce. Both sides are expected to use the next two weeks to negotiate a broader peace arrangement.

From market shock to structural risk

What is becoming increasingly clear is that the situation has evolved into a sustained geopolitical risk rather than a brief market shock. Research groups and regional analysts have highlighted how the number of actors involved, the spread of activity across the Gulf, the Red Sea and the Levant and the limited diplomatic progress all point toward a conflict that may not resolve quickly in its entirety. Even with this morning’s announcement of a two‑week ceasefire between the US and Iran, the underlying dynamics remain highly complex. Structural damage across parts of the region continues to shape pricing along the curve, and the market will not fully stabilise until key gas infrastructure begins to recover and sustained safe passage through the Strait of Hormuz is firmly established.

One notable feature of the past month has been the relative insulation of some Asian buyers, particularly China, who have acknowledged that some of their vessels have used the channel, passing through the Strait of Hormuz. That uninterrupted flow for China as well as several Asian countries has prevented an additional layer of tightness from forming in the LNG and crude markets, and it also underscores the political dimensions shaping which vessels face risk and which do not. It is worth noting that this has been a limited amount, however.

What this means for energy markets

For energy markets, the implications remain significant. Oil is likely to stay both elevated and volatile while the Strait of Hormuz operates under partial constraint, even if marine traffic is temporarily permitted under the ceasefire terms. Gas markets will continue to respond to a blend of geopolitical tension, European fundamentals, and LNG shipping risk, with Qatar’s dependence on Hormuz and the long-term outages at Ras Laffan keeping a persistent risk premium in global LNG. Insurance and freight costs are expected to remain high, and any renewed escalation could force more vessels onto longer routes around the Cape of Good Hope, adding material time and cost to supply chains.

The period since 28 February now marks a clear turning point. What began as a short-lived disturbance has become a structural geopolitical factor that will shape oil, gas, and shipping markets for months, potentially years. Even with the ceasefire in place, companies across the energy value chain face an environment defined by heightened volatility, elevated risk premiums, and a market in which geopolitical headlines can move prices as forcefully as traditional supply and demand fundamentals.

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