Middle East War Disrupts Oil Supply Chains, Raising Recession Fears
Less than a month ago, analysts were warning of a looming glut of crude oil as tanker traffic via the Strait of Hormuz began to recover amid a U.S.-Iran ceasefire. However, the ceasefire was short-lived, and missiles soon flew again, with Yemen's Houthis striking tankers in the Red Sea.
The Brent crude price topped $100 per barrel on reports that the Houthis had struck two Saudi tankers in the Bab el-Mandeb Strait, which Saudi Arabia is currently using as the primary outlet for its crude amid the Iranian blockade of the Strait of Hormuz. Tankers heading to the Red Sea waterway began making U-turns and taking alternative routes, which take longer and cost more.
Meanwhile, Ukrainian drone strikes on the Caspian Pipeline System's terminus on the Black Sea have forced Kazakhstan to suspend most of its oil exports. The Novorossiysk port on Russia's Black Sea coast, where the bulk of Kazakh oil exports depart for world markets, has become a target for these drone attacks.
The Strait of Hormuz used to handle 20 million barrels daily but has slowed to a trickle. The Red Sea chokepoint of Bab el-Mandeb is now almost completely blocked, handling between 4 and 5 million barrels daily of Saudi oil in recent weeks. Adding to the loss are 1.7 million barrels daily from Kazakh flows to Novorossiysk.
The situation with refined petroleum products has become a crisis in its own right, according to Ole Hansen, Saxo Bank's head of commodity strategy: 'Unlike crude oil, refined products face far fewer mitigation options.' He added that several Middle Eastern refineries remain affected by the conflict and Russia's diesel export restrictions are constraining global availability.
Global refining margins have hit an all-time high as evidence that global fuel markets remain tight despite millions of barrels of crude exiting the Strait of Hormuz in recent weeks. The crises are already hurting demand for crude and fuels, with European consumption falling by 5.7% in May and Chinese diesel consumption falling by 10%.
The World Bank is revising its global growth outlooks due to the tight physical market, predicting a mere 1.3% expansion this year, down from 2.9% last year. However, if the ongoing conflicts continue to disrupt energy supply chains, even this forecast may prove too optimistic.