Oil and LNG Squeeze Turns into Full-Blown Crisis

Hope is fading for an end to the oil and LNG squeeze as traders start to price in an extended crisis in the Middle East. For six months, traders have been optimistic about peace talks or a quick victory over Iran, but that optimism has given way to reality.

The physical squeeze is catching up with the market, with a diesel shortage growing increasingly severe, particularly in autumn and winter when demand rises. The Strait of Hormuz, a chokepoint for oil flows, has seen average traffic decline to 11% of pre-war levels, down from an average of 4.8 million barrels daily in July.

Crude oil supply is also getting squeezed, with the International Energy Agency predicting a global oil supply drop of 4.3 million barrels daily for the full year. This would translate into a supply shortfall of 1.27 million barrels daily, exacerbating higher crack spreads and end prices for gasoline, diesel, and jet fuel.

The economic pain from the war is being felt by both the United States and Iran, but neither appears willing to blink first. Until one side gives in, the energy squeeze will only deepen.