Iran War and AI Boom Drive Global Gas Supply Crunch

LNG spot market prices in Asia have tripled since the start of the year. Asia and Europe are locked in a race for a limited number of cargoes. The U.S. is exporting record volumes of the fuel. And QatarEnergy just extended a force majeure on its own LNG exports. The world is short on gas—and will remain so for a while.The Japan-Korea Marker, the Asian LNG benchmark, topped $31 per million British thermal units this month. In fact, the benchmark briefly rose above $33 per mmBtu, compared with a little over $9 per mmBtu in January this year. The price change speaks volumes about the impact of the war in the Persian Gulf on global gas supply security, as it took one of the top three liquefied gas exporters off the market.Replacing Qatar has proven difficult, even for the United States, which has boosted its LNG exports substantially, thanks mostly to strong demand from Europe, which has few alternatives to Qatari LNG, unlike Asia, which has the alternative of coal and is taking advantage of it. Still, gas supply is tight and will remain tight next year as well, the International Energy Agency warned this week.The war between the United States and Israel, and Iran, cost the world some 60 billion cu m in LNG supply losses in the eight months to October, the IEA has estimated. Higher production in the United States and Africa helped fill much of that gap—as much as two-thirds. Alas, two-thirds is not 100%, so a gap remains, and the IEA expects global LNG production to decline by 3% this year, with the March-October period seeing a 6% drop. A 3% supply decline might not seem like much, but it would be the steepest annual drop since records began—and it comes as demand expectations rise amid the AI race. Until the war in the Middle East began, the outlook for natural gas generally and LNG specifically was exceptionally bullish thanks to the boom in data center construction as Big Tech prioritizes artificial intelligence as its number-one growth engine for the future. Data centers, it was quickly discovered, cannot be powered reliably by alternative energy sources such as wind and solar, even with batteries. The most viable—and quickest—option was natural gas.Based on these demand trends, Shell said in its LNG Outlook 2026 that it expected demand for liquefied gas to surge by 65% between this year and 2050—despite the disruption in Qatari exports caused by the war. “The conflict created a system-wide shock with disruption cascading across all segments of the economy, but the LNG industry has proved resilient and able to adapt to changing market conditions,” Shell’s head of natural gas operations said at the time.The LNG industry has indeed adapted, mostly through production ramp-ups at existing facilities or plans for additional capacity that just a year ago was flagged as potentially surplus and leading to a major LNG supply glut. But with the war still quite hot and Qatari gas still unavailable, nobody is talking about a glut anymore. Qatar has taken an interesting approach to securing long-term supply.In recent weeks, the country's state energy company closed two long-term LNG supply deals with U.S. companies. One deal is for 4 million tons of LNG annually from Cheniere Energy. The other is for 3 million tons annually from Woodside Energy. This, according to Reuters, will make QatarEnergy the biggest foreign buyer of U.S. liquefied gas. QatarEnergy has expansion plans, and a force majeure on domestic production is not going to get in the way. This signals confidence in the resilience of LNG demand—even as some question it.Energy Intelligence recently voiced the suggestion that the war-related price surge could dampen demand for liquefied natural gas, in line with historical patterns in oil and other commodities, energy and otherwise. However, it could be counter-argued that any demand dampening in LNG would be, first, limited, and, second, temporary because demand for energy commodities tends to be rather inelastic.Indeed, demand is already down. The IEA reported that over the first nine months of the year, total gas consumption globally went down—but it went down by just 1% or 35 billion cu m. This is not a proportional decline to the squeeze in supply, in evidence of that inelasticity above. It is also evidence that the long-term outlook for LNG and gas in general is rightly optimistic. Unfortunately for those concerned about the relative emission output of gas and coal, so is the outlook for coal, because coal is cheaper than gas.By Irina Slav for Oilprice.comMore Top Reads From Oilprice.comADNOC Gas to Supply LNG to TotalEnergies Under Five-Year DealIndian Refiner BPCL Buys U.S. WTI Crude Oil CargoDubai Benchmark Slips Into Contango for the First Time Since July