Strait talking: Iran war scenarios and the future of energy

LNG

Quick Peace scenario: LNG prices soften soon after a peace deal is announced, but global LNG markets are tight until summer 2027. LNG supply from undamaged Gulf facilities take time to return to full capacity, with delays to projects currently under construction in the region. The anticipated oversupply, albeit delayed until 2028, remains inevitable once the strait reopens from June, however.   

With a major expansion in global LNG capacity under construction, supply is set to increase by about 50% from current levels, restoring confidence in LNG and driving a new phase of demand growth in emerging Asian markets. However, the combined impact of short-term demand destruction and levels of new supply results in a market imbalance. US LNG cargo cancellations are likely to be required to balance the market, more than halving European prices by 2031. Prices then recover slightly between 2030 and 2035. 

Summer Settlement scenario: prices continue to increase through summer 2026 and remain strong well into 2027. Additional delays to Gulf projects under construction reduce supply further, but this only pushes the oversupply into 2029. As countries look to reduce their exposure to LNG, demand downside risk cannot be ruled out, potentially exacerbating the oversupply after 2030. 

Extended Disruption scenario: the global LNG market is fundamentally reshaped. Prices skyrocket, potentially reaching US$40/mmbtu if the conflict restarts. Persistent geopolitical risks and sporadic Strait closures could reshape the LNG market in the long term.  

Future export levels in this scenario are inherently uncertain. The longer the conflict lasts, the greater the risk to future Gulf LNG supply. Unlike liquids, where producers such as Saudi Arabia have alternative export routes and will likely build more, gas will be much harder to reroute.  

Some of the region’s existing supply could be permanently lost. The 60 mmtpa of capacity under construction experiences multi-year delays, while Qatar’s North Field West project – approved earlier this year – could be postponed indefinitely.   

Gas and LNG demand will also be lower as demand destruction follows a prolonged closure of the Strait and takes time to recover. Persisting Gulf LNG supply risks push more countries to diversify away from imported gas and LNG, while higher LNG prices limit emerging Asian markets’ appetite to develop new gas-fired plants, providing more momentum for renewables and coal. Europe could further accelerate the electrification of heating and suitable industrial processes and build even more solar and wind capacity.

What emerges is a market driven by geopolitical risk, periods of extreme price volatility and lower supply and demand. Prices spike during periods of increased tensions between the US and Iran, then fall as LNG supply from the Gulf resumes. In this scenario, LNG prices average US$14/mmbtu in Europe from 2027 to 2030, with Asian LNG prices trading at a significant premium. With more LNG supply outside the Gulf likely to be sanctioned and demand growth slowing post-2030 as greater energy diversification emerges, prices remain subdued for an extended period. As with oil, any future risk to transit through the Strait of Hormuz could still quickly spark a return to market tightness and volatility.

New era of energy price volatility

Whatever the timing of the reopening of the Strait of Hormuz, resuming energy exports from the Gulf is unlikely to be smooth sailing. Iran has demonstrated its ability to deny free passage through the Strait at its choosing, posing an obvious and ongoing risk to future exports of oil and LNG through the Gulf even after a peace agreement is reached.

This could lead to a divergence between market fundamentals and the perceived risk to oil and LNG supply. Traded prices for both commodities are forecast to fall sharply once the Strait reopens and over-supply emerges. But any threat, let alone actual closure, of the Strait of Hormuz by Iran risks spiking energy prices and ushering in a new period of price volatility.

• Traders and LNG portfolio players: increased price volatility plays to the strengths of the world’s largest trading companies and LNG portfolio players. Trading becomes imperative for all large oil and gas companies.

Pursuit of energy independence

The war in Iran is not only eroding long-established international alliances but, in our Extended Disruption scenario, it also encourages a radical policy pivot by import-dependent countries – including most of Europe and Asia – to push for energy independence. Such a pivot is only one possible outcome, however, and would come with its own trade-offs, not least costs and the reliability of supply through any change.  

• Power generation: Import-dependent economies across Europe and Asia could invest in a quicker transition. However, the ability to meaningfully reduce their reliance on gas for power generation only starts after 2030 as coal retirements are deferred and renewables, storage and grid modernisation expand. The energy mix diversifies further after 2040 as nuclear power scales up rapidly.  
• Supply chains: with its low-cost cleantech advantage, China benefits from a pivot towards energy independence. But relying on Chinese low-carbon energy value chains risks replacing dependence on energy imports with dependence on China. Elsewhere, regions including the Middle East and North Africa that are developing supply-chain hubs for clean technologies are facing conflict-related challenges. The war has already resulted in delays and cancellations of more than 30 GW of planned solar module factories in these markets, while battery storage shipments for the year have been revised down by 25%.  
• Miners: the value of supply chains for critical minerals increases as renewables, battery storage and electric vehicles (EVs) grow faster than in our base case. However, miners are largely unprepared to deliver the critical metals required to meet this surge in demand, which would require higher prices. 

Molecules versus electrons

One path towards energy independence for importers is aggressive electrification. Delivering this, though, requires deep pockets to accelerate the shift to an economy powered by electrons and away from a dependence on imported oil and gas molecules. 

• Energy importers: energy costs rise as countries prioritise security over efficiency. Domestic supply, redundant infrastructure and nuclear deployment all carry price premiums. It proves politically challenging to deliver as oil and gas prices fall.
• Resource holders: resource-rich countries seek to maximise hydrocarbon production. The US continues to pursue energy dominance through oil and gas, while developing economies with oil and gas resources incentivise investment to lower costs and maintain competitiveness. 

Climate and emissions

Aggressive electrification for energy security creates a near-term emissions penalty. Coal-to-gas switching reverses in power and industry, and deferred plant retirements keep more coal capacity online for longer. Further out, the emissions picture grows more nuanced as hydrocarbon demand falls and nuclear and renewable capacity increases.  

• Global efforts on emissions: already on life support, global agreements to tackle emissions are deprioritised as coal-fired generation expands to boost energy security.

A reshaped global energy landscape

The war raises potentially significant risks for oil and LNG demand beyond 2030. Governments and producers have a range of options in response.

• Gulf oil and gas producers: the region will remain a critical source of oil and gas for the foreseeable future. Producing countries will seek to mitigate risks to future supply. Developing infrastructure for oil exports to bypass the Strait of Hormuz and investment in storage closer to demand centres will increase energy security and prove lower cost than aggressive energy independence for importers.  
• International oil and gas companies’ Middle East strategies: as other basins mature, including the Permian, the Middle East will remain increasingly crucial to the strategies of the Majors and larger Independents. Alternative egress routes would support investment.
• Oil and gas producers outside the Gulf: low-cost producers in stable regions could expand output. LNG producers will look to capitalise on buyer interest in supply diversification.
• Refiners in oil-importing countries: refiners face a tougher market outlook as long-term oil demand weakens in import-dependent markets.
• Cleantech manufacturers: as electrification accelerates, renewable and nuclear manufacturers and electric vehicle (EV), battery and charging infrastructure producers stand to gain. But rapid electrification requires massive investment in grid development, with major cost implications.