Why Higher Natural Gas Prices Are a Bigger Problem Than Oil
Most of the attention since the Iran conflict began has focused on oil prices, and understandably so. Brent crude is the headline number, the one that leads news bulletins and moves equity markets in real time. But the more significant story for global inflation and economic growth may be what is happening in natural gas and LNG markets. Qatar, which supplies roughly 19 percent of global LNG, has seen its export infrastructure damaged. The price response in gas has been more extreme than in oil, the inflation transmission channels are broader and harder for central banks to look through, and the ability to substitute or reroute supply is more limited. We think this is the under-appreciated risk in the current environment, and the one most likely to surprise investors who are focused exclusively on crude benchmarks.
Published 9 April 2026. Analysis based on institutional research available at time of writing.
Why Gas Prices Have Moved More Than Oil
Oil prices have risen sharply since the conflict began, with Brent expected to average around $90 per barrel in Q2 before declining toward $80 per barrel by Q4. Those are significant moves, but the percentage increase in LNG and natural gas prices has been even larger. This is not a coincidence. The natural gas market has structural characteristics that amplify supply shocks in ways the oil market does not, and the current disruption has hit every one of those vulnerabilities simultaneously.
- Supply dynamics are more rigid. Oil can be shipped in standard tankers from dozens of producing countries with relatively short lead times for rerouting. LNG requires specialised liquefaction facilities at the export end, dedicated cryogenic tankers that are expensive and in limited supply, and regasification infrastructure at the receiving end. You cannot simply redirect LNG supply the way you can with crude oil. Every link in the chain represents a potential bottleneck.
- Spare capacity was already thin. The global LNG market had been running at high utilisation rates for several years prior to the conflict. New liquefaction projects in the US Gulf Coast, Mozambique, and elsewhere were under construction but not yet operational. The buffer that might have absorbed a moderate supply shock simply did not exist when the disruption hit.
- Infrastructure damage appears permanent or semi-permanent. This is the critical distinction from oil. The Strait of Hormuz can reopen once the security situation allows, and oil flows can resume relatively quickly. But physical damage to Qatari liquefaction facilities, which represent a significant share of global capacity, will take years to repair or replace. This means the LNG supply shock has a structural component that will persist well beyond any ceasefire.
- Importers are building precautionary inventories. Countries that rely on LNG imports are scrambling to secure supply ahead of the Northern Hemisphere winter, which is still months away but looms large in the planning of energy ministries and utility companies. This precautionary demand adds buying pressure on top of the supply reduction and requires a larger risk premium in spot prices to incentivise sellers to part with cargoes.
Price Forecasts for the Key Benchmarks
The expected price paths for the major benchmarks give a sense of the magnitude and persistence of the shock.
Brent crude is expected to average approximately $90 per barrel in Q2 2026 before declining to $80 per barrel by Q4 as the Strait situation normalises and strategic reserve refilling demand moderates. This is a meaningful elevation above pre-conflict levels but represents a relatively orderly adjustment.
European natural gas, measured by the TTF benchmark, is expected to average $16.90 per mmBtu in Q2, declining to $13.65 per mmBtu by Q4. Asian LNG, measured by the JKM benchmark, is expected to average $18.15 per mmBtu in Q2, declining to $14.65 per mmBtu by Q4. These represent significantly larger percentage increases from pre-conflict levels than the oil price move, and the decline is slower and less certain because of the structural damage to Qatar’s export infrastructure.
The gap between Q2 peaks and Q4 expected levels is important for understanding the inflation trajectory. Even in the baseline scenario where the conflict resolves and energy flows begin normalising, gas and LNG prices are expected to remain elevated relative to pre-conflict levels through the end of 2026. The refilling of European and Asian gas storage inventories will sustain demand for LNG cargoes well into 2027, keeping a floor under prices even as supply gradually recovers.
Three Channels of Inflation Transmission
Natural gas transmits inflation through three distinct channels, which is why its overall impact on consumer prices can exceed that of oil even when the absolute price level is lower. Understanding these channels matters for assessing which economies are most exposed and how central banks are likely to respond.
The first channel is direct consumer gas costs. In countries where households use natural gas for heating and cooking, higher wholesale prices flow through to retail bills. The speed and magnitude of the passthrough depends on the structure of retail energy markets in each country. In deregulated markets like the UK and parts of the US, the passthrough can be relatively quick, showing up in household bills within a billing cycle or two. In regulated markets where utility pricing is set by government agencies, the passthrough may be delayed but is rarely avoided entirely. This is the most visible and politically sensitive channel because households see it directly on their bills.
The second channel is electricity prices. Natural gas is a major input for power generation in many countries, and because gas-fired plants frequently set the marginal price of electricity in wholesale markets, even countries with substantial renewable or nuclear capacity see their power prices affected when gas prices rise. Institutional research estimates a statistical passthrough rate of approximately 25 percent from the share of electricity produced with gas to household electricity prices. In practical terms, this means a 10 percent increase in the gas price raises household electricity prices by 2.5 percent of the gas-generated share. In countries where gas represents a large share of the generation mix, such as the UK, Italy, and Japan, this channel can be as significant as the direct gas cost channel.
The third channel is downstream producer costs. Higher gas and electricity prices raise input costs for manufacturers, food processors, chemical companies, fertiliser producers, glass makers, steel mills, and a wide range of other industrial users. Gas is not just a fuel for these industries but often a feedstock as well, particularly in chemicals and fertilisers. These higher costs are eventually passed through to consumers as higher prices for goods and services, which shows up in core inflation rather than headline. The lag is longer than for direct energy costs, typically three to six months, but the impact is broader because it affects the prices of goods and services that have no obvious connection to energy in the minds of consumers.
Quantifying the Combined Impact
When you add these three channels together, the inflation impact is substantial and, critically, incremental to the oil price effect that is already being priced by markets.
A 10 percent increase in natural gas prices, separate from any oil price movement, raises global headline inflation by approximately 8 basis points. That may sound small for a 10 percent price move, but natural gas prices have risen far more than 10 percent since the conflict began, and the effect compounds across the three channels described above.
Combined with the oil price impulse from the broader conflict, the total inflation impact rises to approximately 0.8 percent, compared to 0.7 percent from oil alone. The additional 0.1 percentage point may appear modest, but it is concentrated in economies that are already dealing with elevated inflation and comes through channels that affect core as well as headline measures. Risks are skewed toward larger increases if the Strait remains shut longer than the current baseline assumption or if further infrastructure damage reduces Qatar’s LNG export capacity for an extended period.
Why Natural Gas Matters More Today Than Historical Models Suggest
One of the reasons we think markets are underestimating the gas dimension of the current shock is that historical models of energy price passthrough may be understating the current sensitivity. Three structural shifts have occurred over the past three decades that make natural gas price shocks more economically significant today than they were in previous episodes.
- Natural gas share of primary energy has increased. Globally, natural gas now accounts for 23.6 percent of primary energy consumption, up from 20.1 percent in 1990. In high-income countries, the share is even higher at 31.7 percent. This means that a given percentage increase in gas prices hits a larger share of the energy bill than it would have a generation ago.
- LNG markets have expanded dramatically. The globalisation of natural gas through LNG trade over the past decade was supposed to improve energy security by allowing countries to diversify away from pipeline-dependent supply. In many ways it has. But it has also created new vulnerabilities by linking previously isolated regional markets into a single interconnected global market. When a major supply node like Qatar is disrupted, the shock transmits instantly to every LNG-importing country in the world, from Japan to South Korea to Bangladesh to Europe.
- Gas pricing has shifted from oil-indexed to spot mechanisms. Historically, long-term gas contracts in Asia and continental Europe were indexed to oil prices, which provided a degree of price stability and meant that gas prices moved in lockstep with oil rather than independently. Over the past decade, the market has shifted increasingly toward spot LNG pricing and hub-based pricing, which makes gas prices far more sensitive to short-term supply and demand imbalances. This structural change means that supply disruptions now produce larger and faster price spikes than they would have under the old pricing regime.
The net effect of these three shifts is that natural gas price shocks today have a larger, faster, and more broadly distributed economic impact than the historical relationships captured in most macroeconomic models would suggest. Analysts and central bankers who are relying on pre-2015 estimates of energy price passthrough are likely to underestimate the inflation and growth impact of the current gas price surge.
Geographic Exposure Varies Enormously
The impact of higher natural gas prices is distributed very unevenly across the global economy, and the variation is much wider for gas than it is for oil. This is because natural gas markets remain more regional than oil markets, domestic production capacity varies enormously, and the degree of import dependence ranges from near-zero to near-total.
- The United States, Canada, and Australia are largely insulated. All three countries are self-sufficient or net exporters in natural gas production, and their domestic prices are determined primarily by local supply and demand conditions rather than by global spot LNG markets. Henry Hub prices in the US have risen modestly but remain well below international benchmarks. Australian and Canadian producers may actually benefit from higher global prices on their export volumes, though domestic consumers are somewhat insulated by regulatory mechanisms and contract structures.
- Europe is the most exposed major economic bloc. Since cutting Russian pipeline gas in 2022, Europe has become heavily dependent on imported LNG for its gas supply. The continent had been rebuilding its gas security through LNG imports from Qatar, the US, and other suppliers, but the current disruption has exposed the fragility of that strategy. European gas storage levels were adequate heading into the conflict but not generous, and the need to refill storage ahead of winter 2026-27 will keep European demand for LNG cargoes elevated for months. Higher gas prices in Europe flow through to household heating costs, electricity bills, and industrial input costs simultaneously, hitting all three inflation channels at once.
- LNG-dependent Asian economies face varying degrees of exposure. Japan and South Korea import virtually all of their natural gas as LNG and have limited ability to switch to alternative fuels in the short term. Their industrial competitiveness and household energy costs are directly affected by LNG spot prices. India is exposed but to a lesser degree, as it has a more diversified energy mix and has ramped domestic coal production as a partial substitute. China is the most complex case, with significant LNG imports but also substantial domestic gas production, pipeline gas from Central Asia and Russia, and a heavy reliance on coal and electricity for transportation and heating that reduces the direct passthrough of gas prices to the broader economy.
- Middle Eastern gas exporter countries face a different set of dynamics. Countries with undamaged infrastructure and available capacity may benefit from higher prices, while those whose export facilities have been affected face revenue losses alongside reconstruction costs.
The Growth Drag Adds Up
When the natural gas impact is added to the oil price effect, the total drag on global GDP in 2026 rises to approximately 0.5 percent, compared to 0.4 percent from oil alone. That additional 0.1 percentage point may sound small in isolation, but it is concentrated in economies that are already under pressure from multiple headwinds including tighter monetary policy, softening consumer demand, and in the case of Europe, the lingering effects of the 2022 energy crisis that weakened industrial competitiveness.
The GDP impact is larger in Europe than anywhere else, reflecting the continent’s outsized exposure to gas prices across all three inflation channels. For European industrial companies, higher gas prices raise input costs, compress margins, and in some cases make production uneconomic relative to competitors in the US or Asia who pay lower energy costs. This competitive disadvantage was already visible after the 2022 crisis and is being compounded by the current shock.
The risks are skewed toward larger impacts. If the Strait of Hormuz remains shut longer than the mid-April baseline assumption, or if damage to Qatar’s LNG infrastructure proves more extensive than current assessments suggest, both the inflation and growth impacts could exceed the numbers outlined above. The LNG market has very little slack, which means even modest changes in the supply outlook can produce outsized price moves.
What This Means for Investors
We think the natural gas dimension of the current crisis is under-priced relative to oil in most investor portfolios and market commentary. Several specific implications follow from the analysis above.
- Energy portfolios that are weighted toward oil exposure but lack gas and LNG exposure may not be capturing the full upside from the current disruption. LNG shipping companies, US and Australian gas producers with export capacity, and companies involved in LNG infrastructure construction are all positioned to benefit from a prolonged period of elevated global gas prices.
- Companies and economies with heavy gas import dependence face a more persistent headwind than the oil-focused consensus suggests. European industrials, particularly in chemicals, glass, ceramics, and metals processing, are especially vulnerable.
- The divergence between gas-insulated economies (US, Canada, Australia) and gas-exposed economies (Europe, Japan, South Korea) creates opportunities for geographic tilts in portfolio construction. This divergence is likely to persist for longer than the oil price divergence because the structural damage to LNG supply will take years to repair.
- Investors should be paying as much attention to European TTF prices and Asian JKM spot prices as they are to Brent crude. The natural gas benchmarks are likely to be the more important signal for inflation, central bank policy, and regional growth differentials over the next twelve months.
If you would like to discuss how global macro trends might affect your portfolio, request a callback or call us on 1300 889 603.
