Iran Conflict Brief: How the Energy Shock Is Reshaping Investment

**Daniel Sternoff** (0:01)
Events in the Middle East are changing quickly, and the complexities of understanding the global energy landscape grow deeper by the hour. Join me as we talk to leading experts on the latest developments in the region and what it means for the rest of the world. Welcome to our rapid response series, the Iran Conflict Brief, a special edition of the Columbia Energy Exchange podcast. I'm Daniel Sternoff, a Senior Fellow at the Center on Global Energy Policy.
Good afternoon. We are recording this podcast on March 23 at 6:30 p.m. in Washington, DC., 2 a.m. in Tehran, and 2.3 and 1:30 a.m. respectively in Abu Dhabi and Riyadh. The conflict in Iran has been raging for nearly a month and appears to have hit a confusing inflection point. Over the weekend, President Trump gave Iran a 48-hour ultimatum to open the Strait of Hormuz or have its power infrastructure bombed. Iran, credibly, said that would trigger reciprocal attacks on GCC energy infrastructure. Trump's ultimatum turned into a Monday morning taco. The president postponed those strikes after productive talks with Iran on ending the war, talks that Iran denied are even happening. If President Trump takes a diplomatic exit ramp now, the war would end with severe destruction to Iran's conventional forces, but with Tehran having demonstrated that its asymmetric capabilities leave it the undisputed regional power over the Strait of Hormuz and in possession of 440 kg of highly enriched uranium. While diplomacy might be stirring, the US is also sending reinforcements with capabilities to try and open Hormuz by force. Meanwhile, a supply shock of historic proportions is unfolding. Some 16% of world oil supply has been disrupted, more than double the size of the 1970s oil shock, and a fifth of world LNG supply has been shut in, affecting 50% more gas volumes than the Russian gas crisis of 2022 Countries across Asia are curtailing demand, closing schools, rationing cooking fuel, raising thermostats and taking the stairs. The world's largest release of strategic oil inventories will buy weeks, but not months, for most advanced economies. The Trump administration has even eased oil sanctions on Iran to alleviate supply pressure. If ever there was a sign you're scraping the bottom of your bag of tricks, it's providing economic relief to your enemy during war. I'm joined today by Greg Sharenow, who leads the Commodity Portfolio Management Group with Pimco, the asset management giant in Newport Beach, California. Greg co-manages Pimco's energy and tactical credit opportunity strategies, and prior to joining Pimco in 2011, he has traded energy with Hess Energy Trading, Goldman Sachs and DE.

**Greg Sharenow** (2:58)
Shaw.

**Daniel Sternoff** (3:00)
Greg has traded and invested through the commodity and economic cycles of the last quarter century, the China-driven demand super cycle, the global financial crisis, the COVID-19 pandemic. Greg understands short-term tactical markets while keeping his eyes firmly on long-term investment horizons, and I've asked him to join me to talk about current energy markets and potential medium-term implications of this crisis. Good afternoon, Greg.

**Greg Sharenow** (3:25)
Good afternoon, Daniel. Thanks for the opportunity and for that beautiful introduction. I feel great about myself now.

**Daniel Sternoff** (3:31)
Greg, you and I have probably spoken about every geopolitical event to impact energy markets for the better part of two decades, from the Iraq War to Libya to the Russia-Ukraine crisis.
With that perspective, investors have learned to mostly shrug off geopolitical risks as short-term volatility events. I mean, after all, that was the lesson of last June's Israeli-Iran War. It was short, it had little impact on production, and was just a short price event. So coming into this crisis, oil traders have been looking for an opportunity to sell any price spikes on the assumption that Trump is just going to taco. Do you think this crisis is different? Given the scale, does it change how you think about pricing in geopolitical tail risk and commodity portfolios?

**Greg Sharenow** (4:18)
You know, certainly the scale of this event, as you noted in your intro is meaningfully larger than any energy shock that's been in my trading and my research experience personally. You know, you have to go study the history books to see disruption of the supply chain anywhere approximating the scope and scale. And it's not just oil, it's not just natural gas, it's helium, it's methanol, it's fertilizer, it's a tremendous amount of dependencies. And we're just talking about things that come out of the energy chain. You also have aluminum. And this is a truly disruptive event. And it's an event that has clearly extended beyond the recent events in the Middle East. And you can go as far back to 2019, which isn't that long ago, where we had the Appkake and Kareis attack from Iran at that period of time with significant considerations. And that was also a short-lived spike, as Saudi Arabia approved and Saudi Aramco approved, very effective in restarting that production. But I think there's two things we have to always assess right now to determine what the ultimate impact would be on portfolios and risk to the economy, have to do with the duration of the supply disruption. If you think about the Strait of Hormuz, I think of it almost like a pipeline. And you were talking about the Asian economies that have felt the brunt of the impact initially, because it's the shortest pipeline from supply point to consumption point and has experienced the most immediate disruption when that pipeline has been severed. And then you have obviously the impacts on the rest of the world that are taking more time to filter through. So the question is, when is that pipeline, when does that flow get restarted? And the other question is, what capacity has been lost? So we know from Gutter that we've lost two LNG production chains for three to five years. We've lost capacity at the Shell gas to liquids plant, not full plant, but a partial loss. So and that's for years. So these are things that ends up having a much more meaningful impact for a longer period of time. So when we're trying to figure out what the ultimate sum of the loss supplies and the duration of it, we have to know both when the flow will begin and when the production capacity will resume. The one area where I probably am a little less worried about is refiners. As we've seen in Russia, refiners have been attacked on a regular basis and three weeks later, many of the refinery units have been restarted and maybe that's a little optimistic.