How Does Geopolitics Steer the Natural Gas Market? How to Weigh Risks and Opportunities Behind Conflicts and Cooperation?

TradingKey - Conflicts may trigger short-term price surges, while sanctions could permanently reshape long-term supply structures. A single diplomatic breakthrough might instantly trap funds betting on "skyrocketing gas prices."

Let’s examine how geopolitics impacts natural gas markets—and what we should do about it.

The Middle East, one of the world’s most critical energy-producing regions with abundant natural gas reserves, faces persistent production uncertainties due to frequent geopolitical conflicts.

For example, in September 2019, drone attacks on Saudi Aramco’s key oil production facilities not only slashed crude output but also severely disrupted natural gas production. Reports indicated that Saudi Aramco’s ethane and liquefied natural gas (LNG) supply volumes were immediately halved.

Gas transportation functions as a "lifeline" connecting producer and consumer nations. Yet when this lifeline is compromised by conflict, it risks triggering severe supply crises.

The Strait of Hormuz, hailed as one of the world’s most vital energy transit corridors, sees massive LNG vessels daily transporting Middle Eastern gas globally. Should this strategic passage face conflict-related disruptions, the consequences would be catastrophic.

The answer is yes! Sanctions, as a powerful geopolitical tool, can directly cut off a target country’s natural gas export capacity and even cripple its entire industry.

Take this example:

U.S. sanctions on Iran serve as a typical case. Through financial blockades and trade embargoes, the U.S. has attempted to sever Iran’s economic lifeline for natural gas exports.

Restricting Iranian financial institutions from transacting with the international financial system has made it difficult for Iran’s natural gas companies to obtain funding, preventing normal exploration, development, and production activities.

According to International Energy Agency (IEA) data:

Before sanctions were implemented, Iran’s natural gas production reached 230 billion cubic meters in 2019, with exports at approximately 20 billion cubic meters.

As sanctions intensified, by 2024, Iran’s natural gas production had fallen to around 180 billion cubic meters, and exports plummeted to less than 5 billion cubic meters.

(Source: Freepik)

What happens when traditional supply channels are cut off?

When a natural gas-producing country faces sanctions, importing countries that previously relied on it must quickly seek new supply sources. This shift not only alters global natural gas trade flows but also has a profound impact on regional supply-demand balances.

Following the Russia-Ukraine conflict, the EU imposed multiple rounds of sanctions restricting Russian natural gas imports. To fill this supply gap, European countries had to turn to other natural gas suppliers, such as the United States and Qatar.

The U.S. seized the opportunity to significantly increase liquefied natural gas (LNG) exports to Europe, with exports to the continent growing by nearly 50% in 2024 compared to 2021.

Qatar also actively signed supply agreements with European countries to increase natural gas exports to Europe.

However, this transition is not easy and involves certain costs and geopolitical risks.

For investors, the trade pattern changes triggered by sanctions bring both risks and opportunities.

Those who can adjust investment strategies in time to seize market opportunities in new supply countries may achieve substantial returns.

For example, against the backdrop of increased U.S. and Qatari exports to Europe, related supply chain and infrastructure projects may become investment hotspots.

Whether it is friendly cooperation or tense friction, it will have a profound impact on natural gas supply, prices, and market stability.

(Source: Freepik)

1. Win-Win Cooperation

Friendly diplomatic relations are like a solid bridge, promoting energy cooperation between countries and bringing tangible benefits to both sides.

China's deep cooperation with Central Asian countries in the natural gas sector is a successful example.

Thanks to long-term stable diplomatic relations, both sides jointly built the China-Central Asia Natural Gas Pipeline project.

The pipeline officially commenced operations in 2009, transporting abundant natural gas resources from Central Asia to China, with a daily throughput of approximately 100 million cubic meters, providing stable energy security for 27 provinces, regions, and the Hong Kong Special Administrative Region in China.

What benefits does this cooperation bring?

Natural gas cooperation driven by friendly diplomatic relations enables both sides to form a close-knit community of shared interests, reducing risks from single supply channels or market fluctuations, and enhancing resilience in the global natural gas market.

This stable supply relationship also acts as a "stabilizer" for natural gas prices in the market. When supply disruptions or price surges occur in other regions due to conflicts or sanctions, the stable cooperation between China and Central Asia can ease market tensions and prevent violent price fluctuations.

2. Tense Relations

What happens to the natural gas market when diplomatic relations deteriorate?

After the Russia-Ukraine conflict, Russia's relations with European countries deteriorated sharply.

European countries imposed multiple rounds of sanctions on Russia, while Russia took countermeasures, causing a significant impact on their cooperation in the natural gas sector.

Previously, many European countries relied on Russian natural gas imports, but this dependence became unsustainable as diplomatic relations worsened.

To reduce reliance on Russian natural gas, European countries began turning to other supply sources.

For investors, increased market volatility means they may suffer losses due to price fluctuations.

Investors must maintain a high level of vigilance regarding geopolitical events. Whether it is the outbreak of international conflicts, the implementation of sanctions, or major shifts in diplomatic relations, any of these could become the trigger for natural gas market volatility.

When monitoring geopolitical events, investors need to conduct an in-depth analysis of the potential impact of such events on natural gas supply and prices.

Take a conflict event as an example: If a major natural gas-producing country or region becomes embroiled in conflict, investors need to assess the extent of damage to local natural gas production facilities, the duration of production disruptions, and how these factors will affect the global scale of natural gas supply and market expectations.

Through analysis of supply and price impacts, investors can more accurately assess the risks faced by investments, judge the likelihood and potential scale of investment losses, thereby providing a solid basis for subsequent investment decisions.

Investors can pay attention to energy transition trends.

As global demand for clean energy continues to grow, natural gas, as a relatively clean fossil energy, plays an important role in the energy transition process.

And pay attention to the political orientations of various countries, positioning in advance. When supply interruptions or demand shifts occur in certain regions, the asset value of related markets may rise rapidly.