Asia's energy chokepoint: How the Hormuz disruption is impacting energy markets

As the Middle East conflict between Iran and the United States escalates, the Strait of Hormuz – handling 21% of global oil and 20% of LNG trade – has become a critical flashpoint for Asian energy security. Given that Asian economies and energy users are most at risk from downstream supply impacts, here's what the disruption could mean for your budget exposure.

The numbers for Asian buyers are significant: 84% of crude and 83% of LNG transiting Hormuz serve Asian markets, with China, India, Japan and South Korea accounting for about 69% of crude flows and little over half of LNG flows via Hormuz to Asia. Qatar alone supplies 20% of global LNG exports, with more than 80% destined for Asia.

That critical supply route is now effectively shut down, with Iran stopping all commercial shipping through the strait. Meanwhile, the latest Iranian strikes on Saudi and Qatari oil and LNG facilities have prompted QatarEnergy to suspend LNG production after its facilities were hit by Iranian strikes.

Source: EIA

Therefore, with Middle Eastern oil and gas exports to Asia at a critical juncture, key questions we are thinking about at E&C in APAC are: If the Strait of Hormuz traffic remains stagnant or Qatar's LNG capacity falters from weeks to months, what is the impact on Asia's energy balances and prices? Will we see demand destruction like we saw in Europe during the 2021–2022 energy crisis?

Source: Time

Three potential disruption scenarios and market impact

Short disruption (weeks): Strategic stocks can bridge physical gaps. Impact appears primarily as spot price increases and premiums, flowing through electricity fuel-cost passthrough mechanisms with a 1–3-month lag. Price-sensitive buyers consider fuel switching amid higher spot prices but may be limited by the domestic supply of alternative sources. For example, India’s buyers, who switch between natural gas and LPG, face serious constraints.

Extended disruption (months): Balance tightening becomes serious. Power sector fuel switching accelerates, but regulated tariff adjustments and fuel-cost passthroughs lag 2–6 months. Alternative supplies from Australia, the US and Africa become key, but increased exports are limited due to capacity on LNG export facilities. Australia is at a crossroads between helping to meet global demand and prioritizing domestic demand. How much gas Queensland LNG exporters can extract and export, or once again syphon from the domestic market, remains to be seen. There are certainly more eyes on this than there were back in 2017 when they were able to do just that.

Prolonged disruption (months to years): Serious physical shortages emerge for price-sensitive buyers. Reductions in LNG availability are forcing coal switching and power rationing. Global demand destruction increases. Energy transition becomes a key pillar to reduce fossil fuel dependence in electricity markets.

Source: Kelper via Atlantic Council

Asia's vulnerability

Acute exposure: Pakistan, Bangladesh and India are among the most at risk of continued LNG flow disruption given their dependence on Qatari LNG. They are also price-sensitive when it comes to importing spot LNG, relying heavily on long‑term contracts, with limited flexibility in the short term. The risk of demand destruction is notable for these countries, particularly as the conflict drags on and reserves dwindle. Indian state‑run gas suppliers have begun cutting gas deliveries to some industrial customers in anticipation of tighter Qatari supply.

Source: Kpler (Video, timestamp: 11:10)

Special mention here is also needed for India’s LPG sector. India has no formal strategic LPG reserve; only working stocks and operational storage, and is highly reliant on LPG imports – around 85–90%. This fuel is a critical alternative to piped natural gas, and we’ve seen in recent years a large number of industrial consumers switching to LPG as prices for the fuel were lower than those for natural gas. In early March, suppliers are already being curbed for certain sectors in order to keep enough supply for critical sectors like households. India has introduced restrictions on some non-essential LPG uses and prioritized supply for households and critical services, but increased domestic output is unlikely to fully offset disrupted Middle East LPG imports. India has about 20–25 days of crude and refined fuel inventory.

Source: EIA

Significant but somewhat cushioned: Japan and South Korea do import oil and LNG through the Strait of Hormuz, but their supplies are diversified, and both countries are somewhat prepared for roughly 7–8 months of combined public and private oil reserves. Japan currently holds around 2–3 weeks of LNG supply in storage; South Korea’s LNG inventories are significantly smaller, providing roughly 1–2 weeks of cover.

In Japan, the country's trade and industry ministry (Meti) minister stated at a conference that Japan's energy supply is still stable, with no short-term impact expected, but it may consider spot procurement if necessary. Over the long term, if the conflict persists, the new government may ramp up nuclear restarts over the coming years. However, Japan is also a major reseller of LNG, and the government could ask suppliers to redirect resold cargoes back to domestic use, reducing Japan’s LNG re‑exports.

South Korea's climate and energy ministry has activated an emergency energy response task force in preparation for potential supply risks driven by the US-Iran conflict.

Meanwhile, other countries like Taiwan and Singapore rely heavily on LNG for power generation, although their reliance on Qatar’s LNG is limited.

Large but diversified: China is likely to have substantial strategic oil stocks of around 90 days when combining strategic and commercial inventories. It also has a diverse supply base (Russia, Australia, US), which limits physical impact, though price increases still affect industrial costs and regional power tariffs. China still imports significant volumes from the Middle East, so a prolonged disruption would raise costs even if physical shortages are less acute.

Source: Atlantic Council

Risk of supply cuts

Across Asia, governments are already prioritizing households and power generation over industry in LPG and natural gas allocations. So far, only India is rationing supplies. For instance, GAIL/IOC/Petronet have already cut supplies to industries by 10–30%. Meanwhile, China, Japan, Korea, Thailand and others are imposing export curbs or demand destruction on industry.

Key uncertainties

It is still potentially very early days in this war, so actual impacts could change due to aggressive government stockpile releases, demand destruction from high prices, or rapid deployment of alternative supply routes. Additionally, any simultaneous disruptions to non-Gulf suppliers could worsen the effects significantly.

Longer term silver lining

There are viable alternatives already being deployed around the world. Utility‑scale solar is now one of the least‑cost options for new electricity generation in many markets; batteries are increasingly competitive for providing flexibility and peak capacity. Worth exploring, although these technologies have limitations for high-energy and heat-intensive industrial operations.

The medium to long term effect of this war is likely a stronger push for countries towards a faster energy transition, one where the reliance on fossil fuels is considerably reduced for power generation, especially in China, India and Australia; Pakistan is also beginning to add more solar capacity. Solar and batteries continue taking market share and driving down fossil fuel demand. While governments continue to make deals to increase LNG imports or deploy CCS technology, the cost of renewable energy and batteries keeps going down.

Deploying these technologies will likely come at a premium, but the benefits over the long term outweigh budget impacts due to cost uncertainty. It’s a hedge against supply disruptions and fuel cost increases.

For procurement teams managing Asian facilities: stress-test your natural gas or LPG supply contracts against 3–6 month disruption scenarios, verify your fuel-switching capabilities, assess fuel cost pass-through exposure on your electricity budgets and reassess the cost of procuring renewable energy as supply insurance.