Mark Lacey | Middle East conflict impacts: Oil and gas price update

It is impossible to say whether the terrible conflict in the Middle East will deteriorate further, but recent articles and political commentary (particularly from Friday 4 October), point to a risk that global oil markets and global gas markets, could be severely disrupted over the coming months.

It was reported on Thursday 3 October that Iran had shut down its massive Kharg oil terminal, and that no vessels are expected to leave the terminal for the foreseeable future. This is a major terminal (roughly 1.6mb/day of exports – in a 102mb/day global market) and will, without any doubt, have an impact on global supplies if it is permanently shut in. Iran's total current oil production rate is close to 3.4mb/day, and this has recovered from less than 2.0mb/day when sanctions were imposed.

It is important to note that OPEC does have 6mb/day of reported capacity, of which 50% is estimated to be operationally capable of ramping up over the next 12 months. But this assumes that the Strait of Hormuz is not inaccessible during the conflict (around 20% of global oil passes through the Strait of Hormuz).

In gas markets, Iran is a significant producer, but it is not major exporter of gas. Unlike the oil market, there is little or no spare capacity in global gas markets right now. The big players in the region are Qatar and the UAE whose combined exports comprise around 20% of global liquified natural gas (LNG) trade (mostly Qatari). All these volumes pass through the Strait of Hormuz; however, in the past, with the aid of military escorts, supply has not been disrupted.

Despite recent weaknesses in oil prices and reduced demand from China, we maintain a stable outlook, anticipating oil prices within a range of USD 65/bl to USD 85/bl. This forecast is supported by balanced and more normalised demand profile with supply being managed through disciplined capital allocation from non-OPEC participants.

In contrast, we are forecasting strong growth in the global gas market, driven by increasing electricity demand, transitioning from coal-fired power generation, and substantial LNG exports from North America.

A more detailed view on the broader global oil market

Outside of China, global oil demand is relatively stable. But the magnitude of the demand downgrades coming out of China cannot be understated.

Global oil demand estimates have essentially been revised down from March 2024 onward by key agencies (for example the IEA and EIA) from around 1.5mb/day of growth for 2024, to now around 1mb/day. China demand growth has been revised down from 0.6mb/day to just 0.2mb/day. Demand in China has essentially contracted year-on-year since April despite forecasts of growth for the year.

In addition to having a muted outlook for the remainder of 2024, we also struggle to rationalise why demand would accelerate meaningfully in 2025. We certainly expect oil demand to grow in 2025, and we expect oil demand to continue growing until the 2030/2035 period. But taking into consideration China's relatively weak GDP growth outlook, we are forecasting 0.9mb/day of global oil demand growth in 2025.

It is also important to point out that China oil demand growth is not always super strong. Previous growth rates have been impacted by 'over-buying' in order to fill their strategic reserves and it is now believed that the strong growth in China's oil demand throughout 2023 has been overstated due to a replenishment of inventories that were drawn down during the 2020/2021 lockdown period.

If we go back to the 2014 to 2016 period (see chart below), China's apparent oil demand appeared to stagnate, as they used their inventories rather than pay over $100/bl. Investors will remember that this demand weakness was one of the factors that caused the oil price to fall to $35/bl in 2015, the other factor being that the OPEC members decided to flood the market with supply in the face of growing shale oil supply.

Given the clear lack of strength in China's economy, we are forecasting modest oil demand growth in China (0.2mb/day/) in 2025. Indian oil demand growth is forecast to be around 0.4mb/day of growth.

*Mark Lacey is Head of Thematic Equities at Schroders.