Potential Impacts of Persian Gulf Conflict on High-Yield US Oil & Gas Subsectors

Short-term forward curves for the global futures markets across Brent crude, title transfer facility (TTF) natural gas and Japan/Korea marker (JKM) liquefied natural gas (LNG) reflect expectations of supply shocks to the oil and gas markets in the wake of recent events in the Persian Gulf.

For context, Iran effectively controls the flow of ships through the Strait of Hormuz, which represents roughly 20% of global oil and gas flow. Iran’s threat of military actions against ships passing through Hormuz functionally neutralizes OPEC+’s recently announced upcoming production hikes and reduces the strategic viability of neighboring states’ spare capacity in the near term, especially as Iran has a recent history of attacking alternative shipping routes such as the East/West Crude Oil Pipeline and the Red Sea. Iran also launched retaliatory drone strikes on QatarEnergy’s Ras Laffan facility – the world’s largest LNG export facility on a capacity basis – as well as Saudi Aramco’s Ras Tanura refining facility – one of the largest refineries in the Middle East; both the Ras Laffan and Ras Tanura facilities were shut down as of this writing.

President Trump announced earlier today that he anticipates this conflict will persist for four to five weeks and that Tehran indicated it has no plans to negotiate at this time. Iran’s drone and ballistic missile capabilities, as well as its deliberate targeting of critical energy infrastructure in the region, can potentially prolong the conflict, especially if its neighbors such as Saudi Arabia retaliate in response.

As of this writing, neither the U.S. nor any other party has targeted Iran’s Kharg Island, where Iranian export infrastructure is concentrated. The backdrop of upcoming midterm elections in which gasoline prices and overall inflation loom large, as well as the political unpopularity of deploying ground forces, are commonly cited as potential incentives for the U.S. to avoid a prolonged conflict.

At this time, Octus considers the following impacts to different verticals within our high-yield U.S. energy sector coverage to be plausible regardless of how prolonged this conflict turns out to be.

• We expect the crude oil exploration-and-production, or E&P, subsector to take advantage of higher oil prices in the interim, which should support free cash flow generation to support de-leveraging and marginal spread tightening in the short term. More broadly however, we believe the risk premium associated with this conflict needs to persist for a prolonged period in order to support material spread tightening in the medium to longer term.Nonetheless, domestic shale producers ultimately benefit from any geopolitical risk supporting oil prices, especially given the consensus bearish price expectations of a “lower for longer” environment in 2026 prior to this conflict. In the scenario of a sustained conflict supporting oil prices, spreads on select BB- and BB rated bonds in our coverage universe can tighten further, given that the broader BB index is currently trading 75 to 100 bps tighter on average than those selected names.
• We anticipate the natural gas E&P subsector to experience marginal spread tightening in the short term, though to a lesser extent than its oil E&P counterpart because of the wider gap between domestic Henry Hub natural gas pricing and the global TTF and JKM benchmarks compared with the gap between domestic West Texas intermediate oil pricing and the global Brent benchmark. For context, U.S. natural gas pricing is driven more by domestic factors as opposed to global events, though the growth in domestic LNG export capacity has recently led to a slightly stronger link with global pricing.
• We anticipate the natural gas and LNG midstream subsector to experience marginal spread tightening in the short term due to bullish indicators from global LNG pricing and shortage of stocks in key global regions such as Europe. Larger players in particular are more likely to benefit from the TTF price rally by selling lucrative spot cargoes into the European market. Incremental volume upside is limited, however, by the hard capacity limit on U.S. LNG exports of 19.5 billion cubic feet per day. Further, spreads in the midstream subsector have already been relatively tight to begin with, compared with other subsectors, even before this conflict arose.
• We anticipate the crude oil refining subsector to experience material spread widening in the short to medium term due to the tightening of crack spreads directly reducing profitability of these refiners which have benefited from low input prices in recent quarters. Retail fuel distributors’ ability to raise gasoline prices in this environment may also draw political scrutiny. We also note that high-yield independent refiners PBF Energy and CVR Energy also exhibit idiosyncratic risk due to their recent history of plant closure incidents.
• We anticipate the international oilfield services and offshore drilling subsectors to experience considerable spread widening in the short term, especially for companies with significant exposure to affected regions in the Middle East, though we expect these companies to shift their contract mix to regions with less geopolitical risk over the longer term. In contrast, we expect the domestic onshoring drilling subsector to exhibit comparatively less spread volatility