Natural Gas in Focus: Iran Conflict Could Have ‘Very Painful’ Consequences

[music] While oil is dominating the headlines in the wake of the Iran conflict, there's an equally unsettling story unfolding in the natural gas markets. I'm Allison Nathan and this is Goldman Sachs Exchanges. [music] For today's episode, I'm sitting down with Samantha Dart, co-head of Global Commodities Research, to talk about the implications of a natural gas shock, which may in some cases actually be more damaging than an oil shock. Sam, welcome back to Exchanges. Thanks for having me. Sam, we have talked a lot on this podcast about the impact that the war in Iran is having on oil markets. But today, I want to dig into the implications for natural gas markets and liquefied natural gas, which is commonly referred to as LNG, because I think it's actually an area that a lot of listeners under appreciate in terms of this conflict and in terms of its importance in the economy. So let's just start at a high level. First, give us the basics. What makes natural gas markets fundamentally different in how they respond to geopolitical shocks? Yeah, I think the main difference is the seasonality of demand, the fact that you need so much of it in the winter. And maybe we should take a step back and think, "What do we use this thing for?" And there are three main uses. The first one you can think of is electricity generation. Just you have a lot of utilities they have, in the same way they have nuclear plants and coal plants, they have natural gas run power plants. You also have a lot of use of natural gas for industrial applications. You can either use that directly as a feedstock into whatever you are producing, or what is most common is to just use to generate heat and energy for the manufacturing processes. And the thing that is used for the most is really heating in the winter. So the whole Northern Hemisphere really focuses on having enough natural gas just ahead of winter. And this creates a little bit of a predictable price dynamic tied to storage dynamic. These markets, they use so much of it for heating from, say, November through March, that's where they are drawing inventories down. And from April through October, it's like the opportunity time to rebuild those inventories. So the way that prices move, usually they move exactly to help the market building inventories in the summer that April to October period, so that you have enough in the winter. So you have a shock like this, a supply shock today, and we're not in winter anymore, but we have that looming in the horizon. It's almost like a deadline. Okay, you have seven months to fix this and not just fix the disruption you have today. Whatever impact that has had on inventories today, we have to offset it completely by the end of October. So it's that tight deadline that can keep things very tight and can make this process somewhat painful because if you don't have supply and you don't have spare capacity in the system, which you usually don't for natural gas, then prices have to go up and up and up to destroy the man and make this work. Right. So both industry, if I'm hearing you correctly, 10 households are very exposed to these natural gas disruptions and the seasonality plays a big part in this. If we think about what's happening in the war right now and the escalation we have seen, there's been attacks, reported attacks on Cattari, LNG infrastructure, liquefied natural gas infrastructure. So that's put at risk 20% of global LNG supplies. Just give us an update on where we are in terms of the supply picture right now amid this conflict. Yeah, I want to look at 2025 data, Qatar produces the equivalent of just about 20% of global LNG supplies. And all of that is disrupted at the moment. It's all shut down, their capacity is shut down. And we had the bombings of infrastructure a couple of weeks ago that has caused long-term damage to some of that infrastructure. So even when the flows through the Strait of Hormuz are restored, Qatar's supply is not going to fully come back to normal for many years. So if we think about how the market has actually responded to these massive disruptions, give us the lay of the land, and is there anything surprising about how the market has reacted? Yeah, to be honest, I would have expected prices to have rallied more than they have. Prices have gone up, don't get me wrong, they've gone up over 50% already. I'd say between 50 and 70% depending on the day. But that's only enough to make natural gas more expensive than coal. And that does help if you're making natural gas more expensive than coal. You're creating the incentive for utilities. Okay, just burn more coal and leave the gas alone for storage for the winter. But for a shock of this magnitude, I would have expected more. I would have expected that natural gas would maybe become more expensive than some oil products, like propane or fuel oil, to incentivize additional switching. Or also to incentivize additional industrial shutdowns in Asia. Asia used to receive most of the Qatar Al-NG. So the higher natural gas prices are, the lower the operation rates at a lot of Asian industrial sites. And we're not seeing that. I mean, we're seeing some demand destruction. But prices are just above coal and nothing else. Right, let me just interject for a second. Because it is an interesting dynamic, this substituting dynamic. Maybe just give us 30 seconds on what that looks like when you talk about all the substitution and the role that really plays in this market. Yeah, a lot of times it's really about what incentive you're giving to utilities. For example, I can generate power with natural gas in my plant. And I have, let's say, a neighbor that runs a coal-fired power plant. And usually if coal is more expensive than gas, which happens in Europe in particular where you have carbon pricing, then you're not really using a lot of coal and you're using a lot of natural gas. The moment that your gas gets super expensive, I look at that and even if I'm not the one running the coal plant, I have the incentive to just shut my plant down and buy the electricity from those guys burning coal because that's cheaper. So yes, there's a lot of flexibility in how you generate power, which again, I think is a little bit underappreciated. So you mentioned that there's actually been some long-term damage to some of the supply infrastructure. Talk to us about what it's going to take to get back to where we were before the war. After the bombings, Carter came out and said, "Oh, it's going to take us three to five years to restore capacity to 100%. When they say three to five years, it doesn't take three years to fix anything." What they're really saying is these two liquefaction trains were so damaged that we need to start over. We need to rebuild them from scratch. So this is the risk that you run, that you can have infrastructure that is just completely flat and you just need to rebuild it and this does take years. Even if there isn't that much long-term damage in some of this capacity, what will it take to actually get it back online? Yeah, there are a few issues to think about. The first one is when we think about the production site itself. It's very large, it was fully shut down. That can be restarted, I think it would take no longer than two to three weeks. But you have, I think, two main challenges beyond that. The first one is that Carter is a prolific exporter, so they have dozens of thinkers that are just scattered at the moment and you would have that logistical challenge of getting everybody in line, get everybody together to load new cargoes and send them out. So if you think in a matter of weeks that can be solved too, but now the second challenge after the bombings that we saw is, do you have Shrapnel that maybe damaged other infrastructure that we don't know about yet? So at this point, I imagine they will have to review the state of infrastructure and we don't know what they're going to find, so it can potentially lengthen this disruption. So what are you expecting now in terms of thinking about supply losses going forward? Yeah, so we talked about at the moment just about 20% of supply disrupted. If we assume that this gets resolved in the next few weeks, then for the remainder of the year, that gets moderated. And your overall, let's say, balance of the year, damage to supplies, not that large. We're talking maybe five, six percent of supply of liquefied natural gas. But that brings us back to the issue of duration. What if it's not solved in the next couple of weeks? What if this thing drags? And the longer it goes, the more damage you do to that task of rebuilding storage capacity. So that's why the potential for price increases is not done. We can see much more from here. I think one of the reasons why we haven't seen more right now, we talked about how surprising it was that prices hadn't gone up more. Is you look at European balances today. They don't look that bad in terms of LNG, inflows into the region. Qatar was sending most of it to Asia. Asia has been the main one hit so far. One big driver of that has been China. China had a mild winter. So they had plenty of storage. And they looked at those high prices and thought, maybe we ought to use our inventory is a little bit more. And now that we're at the tail end of winter, we're not going to need it much. And sell those cargos into a very high international market. So that's what they've done. And by doing that, they've allowed Europe to keep more LNG coming in. So prices are somewhat moderate, but the longer this goes, the amount of supply you're losing from Qatar every single day. So they is still more than four times what China is saving the world right now. And there are other sources of supply too. So the US is a very large LNG exporter. Can it make up for some of the shortfall? You're right. The US alone is responsible for just about 30% of global liquefied natural gas supply today. The problem is there is no spare capacity. What you see is what you get. So you can have international prices rally rally rally and I'm sure the US LNG exporters would love to sell more into that attractive market. But they don't have the capacity to and again this is capacity that takes such a long time to be built. You can't fix that overnight. So you end up with a situation where the US the largest producer of LNG in the world is just sitting there and can't help the rest of the world rebalance the market. So the US doesn't have access capacity. Asia has been selling into the market but that can't go on forever as you just said. So what does this all mean for Europe? It's very fresh in everyone's minds the 2022 experience where Europe was really scrambling in the wake of the Russia invasion of Ukraine and the impact on natural gas markets then. Is it likely to see a similar scenario or how concerned are you about such a scenario playing out this year? That's a good question. We like to think that there is no imbalance that you can see this many months in advance that can't be solved. But to me it does come down to the duration of this disruption because right now we have China with low demand, we have this potential ceasefire deal that we may get if the situation is resolved then we have no problem for Europe for the winter. But if this thing drags longer it will require more demand destruction to fix inventories before we get to next winter. So there is a risk that this just drags so much that it makes the process very painful meaning very high prices to destroy a lot of demand. So it's really duration dependent here. And so best case scenario worst case scenario, what are your expectations in terms of the distribution of outcomes? So if this disruption gets resolved imminently all that natural gas prices need to do is just to continue to price above coal for the remainder of summer. What this means is maybe about 20% below where they are today. So that's good news for Europe, it's good news for the rest of the world. But if the conflict drags and really overwhelms this saving of demand that China is showing the rest of the world then that might not be enough. And then what we think we might see is 50 to 100% of upside to prices from current levels because we would need to get to a different stage where markets need to incentivize more demand destruction. And this is how much it might cost. So the scenarios they are so binary here, things can look really affordable pretty soon or we might have to just test new highs and like I said up to 100% higher than we are today just to make sure we have enough natural gas for an ex-winter. And there's a lot of mixed signals about the conflict right now. And what I'm hearing from you is that's complicating this process a bit because it is letting the market avoid higher price bikes today because of the uncertainty but they may come into the market later if need be. Yeah, it's so interesting, it's almost like that story of the frog in hot water that it's just, you know, I heard that's a myth but it still works as a metaphor. If the water is heating up and the frog is not jumping out, it's gonna die. So we are in the situation where the headlines are back and forth, it's distinct gonna end, maybe not, maybe it is, maybe not. And prices are not giving us enough incentive to destroy the man and guarantee the storage situation today so we're not. We're not doing that. Is it going to be too close to winter to get it done when the time comes? And I think that's the real risk. Fascinating Sam, thank you so much for joining us. This episode of Goldman Sachs Exchanges was quoted on Monday April 6th, 2026. And as always, keep up with the latest market moves and opportunities with our weekly companion podcast, The Markets. New episodes are released every Friday and all major podcast platforms. I'm Allison Ethan, thanks for listening. 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