Everything is going wrong for oil markets right now
Everything is going wrong for oil markets right now.
The second wave of the US-Iran conflict shows no signs of letting up. Attacks by the Houthi militia have threatened to curtail shipping through the Red Sea. Russia's refineries are buckling under the weight of bombardment by the Ukrainian military.
For global oil markets, already in a precarious situation, critical logistical nodes just keep getting thwarted. Things keep going wrong. Oil prices have started rebounding in return, reaching levels not seen since the first weeks of June before the signing of the US-Iran memorandum of understanding, with international Brent futures ( BZ=F ) nearing $100 per barrel.
"If a ceasefire does not materialize," Rystad Energy head of geopolitical analysis Jorge León said, "the risk of a significant rebound in oil prices would be substantial."
As the war between the US and Iran initially began in late February, attention swung toward the Strait of Hormuz, a critical waterway responsible for roughly a fifth of the world's oil trade. Threats of violence and, eventually, direct attacks on vessels by Iranian military wings sent traffic through the strait collapsing, kicking off the largest energy supply crisis on record.
Six months down the road, as the conflict has reignited, the danger for the global oil market has diversified, no longer concentrated in a single waterway or oil-producing country. Instead, disruptions are accumulating across the infrastructure that carries crude from the Middle East, processes Russian oil into 11% of the world's diesel, and supplies fuel to consumers from Europe to Asia — and at a time when the market is already squeezed after half a year's worth of supply disruptions.
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That has created a difficult problem for the market: Even where barrels remain available, fewer routes exist to move them, fewer refineries have room to process them, and fewer emergency buffers remain available to absorb another prolonged outage as new threats emerge.
Top of mind for investors remains the Strait of Hormuz, where, after beginning a short-lived recovery, transits of the critical waterway have plunged downward once more. Between July 20 and 21, the waterway recorded only 22 verified crossings, according to Kpler data, compared with more than 100 daily transits recorded before the war.
Iranian leaders have insisted since the conflict reignited two weeks ago that unless the Islamic Republic is allowed control over the Strait of Hormuz, the waterway will remain under threat, prompting shipowners and captains to hold back from making a crossing that could prove dangerous.
"In a region where we do not sell oil, no one will sell oil. If our security is not ensured, no infrastructure will be safe, and the security of the strait is in the absence of American forces," Mohammad Bagher Ghalibaf, speaker of the Iranian parliament, wrote on X . "We have repeatedly said that the situation of the strait will not return to pre-war conditions."
The newest threat to emerge sits roughly 1,300 miles west across Saudi Arabia, where the Red Sea meets the Gulf of Aden — and where the Houthis, an Iran-backed militant group based in Yemen, attacked two Saudi Arabian vessels in the Red Sea overnight on Wednesday.
Since the Iran war began, Saudi Arabia has managed to increase the amount of oil the Gulf kingdom sends through its East-West pipeline — which runs from the Persian Gulf to the port of Yanbu on the Red Sea — to roughly 4 million barrels per day, per Rystad Energy, a critical release valve for oil trapped behind the Strait of Hormuz.
If the Houthis successfully cut off the Bab el-Mandeb Strait, which connects the Red Sea to the Gulf of Aden and has seen roughly 9 million bpd of oil flows over the past month, the market could lose up to half of the oil currently exiting the Persian Gulf.
Though some oil could travel north in the Red Sea to the Suez Canal, connecting the Mediterranean Sea, the canal is too shallow to accommodate the largest class of oil tankers when they are fully laden, adding time and cost to shipments. Satellite imagery and vessel-tracking data have already shown vessels that had been heading south reversing course.
"With the Gulf's primary maritime outlet largely closed, the market is increasingly dependent on Saudi Arabia's East-West pipeline and Red Sea terminals to maintain export flows," Rystad's León said. "Any disruption at Bab el-Mandeb would therefore threaten not only Saudi shipments but one of the few remaining routes capable of compensating for the severe reduction in Hormuz traffic."
Problems have also appeared further north, throughout Russia, and on the shores of the Black Sea. Over the past year, the Ukrainian military has turned its long-range capabilities toward hobbling Russia's energy sector, one of the largest sources of funding for Moscow. After attacks on more than a dozen refineries across Russia, the nation suspended diesel exports, choking off roughly 10% of the world's diesel supply.
Just this week, the Caspian Pipeline Consortium, which carries oil from Kazakhstan to an export terminal on Russia's Black Sea coast, announced on Monday that it was suspending loadings after drone attacks on oil tankers in the Consortium's Black Sea terminals, per Reuters. The CPC pipeline accounts for roughly 2% of the global oil trade.
The effects of the array of problems in the oil complex are showing up even more stiffly in the refined products markets, for crude derivatives such as diesel, gasoline, and jet fuel. US refiners are running near max capacity, while those throughout Russia and the Middle East have come under fire as war targets. The 3-2-1 crack spread, a benchmark reading on the margins refineries can make when turning crude oil into derivative products, is hitting all-time highs, meaning buyers have to pay higher prices to refiners.
