The escalation of hostility between the United States and Iran after the U.S. assassination of a top Iranian military commander is the top news story so far this year. The potential repercussions of an open conflict would be numerous, and now analysts are warning they will not be limited to the oil market, but would spill into other energy products too, such as LNG.

Iran’s neighbor Qatar was until recently the world’s largest supplier of liquefied natural gas. Last year, according to S&P Global Platts figures, Qatar supplied 22 percent of the global LNG. In the event of a war, this supply could be disrupted.

"Should tensions in the Middle East escalate, it is likely that spot Asian LNG prices would rise to reflect the concern that Middle Eastern LNG supply could be reduced if the Strait of Hormuz was closed or supply through the Strait limited," analyst David Lenesma from the Oxford Institute for Energy Studies told S&P Global Platts.

This should provide some breathing room for LNG producers; some of them are struggling to turn in a profit amid a stable oversupply resulting from the addition of several-large-scale projects in the past couple of years.

However, some note that the chances of Qatar getting involved in the conflict are not too great.

"Qatar is friendly with both sides and is unlikely to be targeted," S&P Global Platts quoted an unnamed analyst from a trading house. "Except in the event of a full blockade of the Strait of Hormuz, the issues are unlikely to have any significant impact on LNG flows. And any full blockade will be very much short-lived."

In other words, there is enough LNG supply available outside the Middle East to keep a lid on prices even if a war between the United States and Iran breaks out. Indeed, last year Australia overtook Qatar as the world’s top supplier of the fuel, exporting 77.9 million tons last year, according to new data from consultancy EnergyQuest. To compare, Qatar exported some 75 million tons. Related: How To Short The World’s Largest Oil Company

"The LNG market is currently oversupplied; hence an interruption to LNG exports from Gulf countries, in the unlikely event such interruption should take place, can be balanced by supplies from outside the region and product in storage at import terminals over a period of weeks, if not months," analyst Morten Frisch told S&P Global.

Despite the small chance of Qatar getting embroiled in a conflict, the fact of its proximity to Iran could be enough to push LNG prices on the spot market higher. This is what happens with oil prices every time tensions flare up in the Middle East, regardless of how intense the flare-up actually is. Commodity markets are sensitive to geopolitical risk, regardless of the actual danger of supply disruption.

Because of this heightened sensitivity, LNG prices could start trending higher soon. For now, they are stable, but that’s not just because of the relatively low risk for a supply disruption. It’s because the Christmas holidays are a time of lower trading activity, which have this year coupled with low liquidity. Supply of LNG in some of the major consuming regions, such as Europe, is ample, which would provide a cushion against price shocks in case Qatar does get involved in an open conflict in the Middle East.

Meanwhile, fresh data showed that China broke another LNG import record last month, taking in 7.189 million tons of the fuel, according to Refinitiv Eikon data reported by Reuters. That was almost 16 percent higher than its November LNG imports and suggests the world’s top LNG importer, too, has enough LNG to weather a potential disruption, no matter how short-lived it might be. In LNG, it’s business as usual.

By Irina Slav for Oilprice.com

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