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. Within days of these warnings, the ceasefire was a painful memory, missiles were flying again, and now Yemen’s Houthis are striking tankers in the Red Sea, which makes two blocked oil chokepoints and a very real danger of a global recession.
Brent crude this week 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. Soon enough it emerged that tankers that were heading to the Red Sea waterway were making U-turns and heading to 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 target of the drone attacks was the Novorossiysk port on Russia’s Black Sea coast, which also happens to be the point of departure of the bulk of Kazakh oil exports to world markets. Bloomberg reported this week that tanker operators were getting nervous about sending their vessels to the port of Novorossiysk because Ukrainian drones were also striking ships at the port.
The Strait of Hormuz used to see average daily oil volumes of some 20 million barrels daily. This has now slowed to a trickle. The Red Sea chokepoint of Bab el-Mandeb has been handling between 4 and 5 million barrels daily of Saudi oil in recent weeks, according to different estimates. Now, this too appears to be almost completely blocked. Add to this the loss of 1.7 million barrels daily in Kazakh flows to Novorossiysk, and the global oil supply picture takes on a rather grim tint. Additionally, the Ukrainian forces continue to target Russian refineries, which has already led to a temporary ban on diesel exports at a time when global fuel inventories are getting strained by the first-wave effects of the Middle East war.
In fact, the situation with refined petroleum products is a major crisis in its own right. “Unlike crude oil, refined products face far fewer mitigation options. Several Middle Eastern refineries remain affected by the ongoing conflict while Russia’s diesel export restrictions continue to constrain global availability,” Ole Hansen, Saxo Bank’s head of commodity strategy, said in an analysis earlier this month. “Refining capacity globally also remains relatively limited, preventing crude supply increases from quickly translating into additional diesel and gasoline production,” he added.
As a result, global refining margins hit an all-time high in hard evidence that global fuel markets remain very tight despite the millions of barrels of crude that had managed to exit the Strait of Hormuz in recent weeks, before the peace negotiations between Tehran and Washington broke down.
The crises are already hurting demand for crude and fuels. In Europe, which is short on diesel stocks, consumption fell by 5.7% in May, according to data from the International Energy Agency quoted by Reuters. In China, diesel consumption also fell in May, by 10%, and gasoline demand also fell, by a more modest 5%. Meanwhile, global crude stocks are being depleted.
“The large strategic stock releases earlier in the conflict have meaningfully depleted the buffer available for any future disruption,” Vortexa analyst Mick Strautmann said earlier in July, as quoted by the Wall Street Journal. The head of the International Energy Agency, however, said there was still plenty of oil in OECD storage for further releases if necessary.
“IEA countries still hold a substantial volume of emergency stocks in reserve, including over 1 billion barrels of government-controlled stocks,” Fatih Birol said in a statement on oil markets this week. He added, however, “There is no room for complacency on oil security amid the escalation in hostilities and a continued drawdown of available commercial inventories.”
Demand for crude oil globally fell by close to 5% in the second quarter of the year, according to IEA data, as a natural result of the oil price spike caused by the war in the Middle East. This is perhaps the surest sign of a tight physical market, even with the warnings of a glut on the horizon that began pouring out of media reports in June.
It is hardly a surprise in such a context that the World Bank is once again revising its global growth outlooks. The institution’s chief economist Indermit Gill told Reuters the WB now expected the global economy to only expand by 1.3% this year, down from 2.9% last year. However, this may be too good to be true if the wars that are hurting energy supply chains continue. For now, this appears to be the most likely development with little desire for peace. This, in turn, means that the danger of recession is quite real.
By Irina Slav for Oilprice.com