Global Energy and Chemical Supply Chain Facing Severe Test
Global Energy and Chemical Supply Chain Facing Severe Test
Transportation in the Strait of Hormuz has been paralyzed, and energy facilities in Saudi Arabia and other countries have been attacked.
The sudden escalation of tensions in the Middle East has brought energy transportation through the Strait of Hormuz to a near standstill, creating severe disruptions in the shipment of petrochemical products. Meanwhile, energy infrastructure in Saudi Arabia, Qatar, Kuwait, and Iran has also been targeted. These developments triggered a 10% surge in Brent crude oil prices to above $80 per barrel during early Asian trading on March 2, with Asian liquefied natural gas (LNG) spot prices facing a potential 130% spike. The global petrochemical industry is now confronting a critical test of supply chain restructuring.
The focus of energy security concerns lies in the Strait of Hormuz, a vital waterway that supplies approximately 15% of global oil. Any disruption here directly impacts oil prices. However, the current situation in the region is highly concerning. On March 1, a 7,600-ton dual-purpose oil and chemical carrier named Skylight was attacked near the strait’s narrowest point, north of Oman’s Port of Qasab. Reports indicate that three civilian vessels were targeted in the area that day.
As of press time, shipping tracking platform MarineTraffic reported that at least 200 vessels had anchored, bringing maritime operations to a near standstill. Speculation persists over whether Iran has officially declared the Strait of Hormuz closed. At a March 1 webinar, Amina Bakr, Middle East and OPEC+ Research Director at energy trade intelligence firm Kpler, stated: “While the Strait remains nominally open, ships are reluctant to navigate it. International oil companies have advised against using this route due to insurance risks. With premium rates soaring to unprecedented levels, no shipowners are willing to take the risk of crossing the Strait.”
In its latest report, Citibank outlined a baseline scenario for the oil and gas sector: Brent crude would trade between $80 and $90 per barrel within a week of conflict. Goldman Sachs provided a more nuanced assessment, noting that current oil prices already factor in a $18 per barrel real-time risk premium. However, if the Strait of Hormuz flow is cut by 50% for a month, the energy sector could adapt, potentially reducing the war risk premium to $4 per barrel. Wood Mackenzie issued the most alarming warning, stating that oil prices could exceed $100 per barrel if tanker shipments fail to resume promptly.
The escalating risks from the conflict have intensified, with Iran’s drone and missile threats forcing preventive shutdowns at Iraqi oil fields. Qatar Energy Company halted liquefied natural gas (LNG) production and related operations after military strikes on its facilities in Ras Laffan and Maysaid industrial cities. On March 2, Saudi Aramco shut down its Ras Tanura refinery as a precaution following drone attacks.
While the oil market still has strategic reserves as a buffer, the natural gas market faces an even more precarious situation. Goldman Sachs analysts warn that if shipping disruptions in the Strait of Hormuz last for a month, Asian spot LNG prices could surge by 130% to $25 per million British thermal units (BTU).
Qatar has been hit hardest. As the world’s second-largest LNG exporter after the United States, it supplies about 20% of global LNG and must channel all exports through the Strait of Hormuz—a vital route also used by fellow exporter the United Arab Emirates. Kpler senior analyst Amina Bakr noted that Israel’s production cuts at its offshore gas fields, in addition to the strait’s risks, have further exacerbated supply shortages.
As the conflict persists, the skyrocketing oil and gas prices are being transmitted to downstream chemical industries, triggering a chain reaction of cost shocks. Cracking units that primarily use naphtha as feedstock are the first to bear the brunt. As Asia is the world’s main producer of chemical products, most of its cracking facilities rely on naphtha feedstock, which is indirectly linked to natural gas prices. The surge in LNG prices has driven up the costs of gas-based chemicals in Europe, leaving Asian buyers equally vulnerable to the impact.
Cost transmission operates through two primary channels: First, it directly inflates prices of fundamental chemical products like olefins and aromatics, squeezing profit margins for downstream processors such as plastics and chemical fiber manufacturers. Second, if end-users cannot absorb the elevated costs, this may trigger reduced production rates and capacity exits. Historical patterns show that when oil prices exceed $100 and remain at high levels, the chemical industry often faces a dual challenge of “cost-driven inflation” and “demand-suppressed contraction” simultaneously.
The more profound impact lies in the restructuring of supply chains. Following the Russia-Ukraine conflict, European chemical companies had significantly reduced production due to soaring gas prices, with some capacity permanently phased out. If shipping through the Strait of Hormuz remains disrupted for an extended period, Asian buyers will be forced to reassess their dependence on Qatar’s LNG. The northern gas field project currently under expansion in Qatar was once seen as the main driver of global LNG growth over the next decade, but structural risks in export routes could prompt importing countries to accelerate diversification. Wood Mackenzie points out that the closure of the Strait of Hormuz threatens 20% of global LNG supply, posing a severe challenge to Asian economies undergoing energy transition. Traditional LNG importers like Japan and South Korea will have to rebalance between high-priced spot prices and long-term contracts. In the chemical sector, Middle Eastern products such as methanol, liquefied petroleum gas, and ethylene account for about 20% of global production. Iran, a key chemical producer in the region, has been particularly hard hit by export disruptions. As the world’s second-largest methanol producer, Iran produces 9 to 10 million tons annually, with over 80% exported. Industry analysts note that the conflict will accelerate the depletion of methanol port inventories in China, potentially triggering a supply-driven price surge that could ripple through the downstream olefin supply chain. In the urea sector, Iran’s annual production capacity stands at around 13 million tons, accounting for 5.42% of global output, with annual exports reaching 9 to 10 million tons. Any disruption in these exports would directly impact the global fertilizer market and the olefin supply chain.
Finally, high oil prices may trigger widespread economic turbulence, driving up inflation and intensifying domestic political pressures in multiple countries.
