Renewed hostilities between the United States and Iran, combined with Houthi attacks in the Red Sea, are pushing global oil markets back toward crisis territory. With inventories already severely depleted, the world may have far less room to absorb another major supply shock.
Global oil prices are once again approaching $100 a barrel as fighting intensifies across the Middle East, reviving fears that an already stretched energy market could face a far more damaging supply disruption.
Renewed hostilities between the United States and Iran have brought traffic through the Strait of Hormuz close to a halt. At the same time, the Tehran-allied Houthis have intensified attacks on tankers in the Red Sea and imposed a naval blockade against Saudi Arabia in the Bab el-Mandeb Strait.
The two waterways are among the world's most important energy chokepoints. Together, the Strait of Hormuz and Bab el-Mandeb carry the equivalent of roughly a quarter of global oil supply.
Brent crude futures reached $102 a barrel on Thursday before closing at $100.69, the highest settlement since May 22. Although prices slipped below $100 on Friday, Brent was still up more than 12% for the week and nearly 40% above its level when the Iran war began in February.
The market is increasingly concerned that the latest escalation could become more difficult to contain than the previous one.
A market with less room for error
Goldman Sachs has warned that Brent could exceed $120 a barrel in the fourth quarter and average around $100 next year if disruptions in the Strait of Hormuz continue through 2027. The upside risk would be even greater if the Bab el-Mandeb Strait and Suez Canal also suffered prolonged disruptions.
JPMorgan estimates that each additional month of supply disruption could add approximately $7 to $8 a barrel to Brent. A three-month disruption could therefore push monthly average prices toward $114 a barrel.
The key difference this time is not simply the geopolitical risk. It is the condition of the global oil market itself.
When the conflict first erupted and Hormuz traffic was disrupted, Brent surged to a four-year high of $126.41 a barrel by the end of April. US West Texas Intermediate crude also approached $120 a barrel in March.
The initial surge raised fears of an extreme scenario in which oil prices could climb above $200, triggering another inflationary shock, higher interest rates, panic buying at gas stations and a severe global slowdown.
That scenario never materialized.
Prices fell steadily through June, eventually dropping below $70 a barrel. A temporary US-Iran ceasefire memorandum helped restore tanker traffic through Hormuz, while a massive release of strategic petroleum reserves provided additional barrels to the market.
Weaker global demand, particularly in China, also helped ease pressure.
But the subsequent decline may have created a dangerous illusion of safety.
The strategic reserve problem
One of the biggest reasons oil markets survived the first shock was the willingness of governments to release emergency supplies.
On March 11, the International Energy Agency's 32 member states unanimously approved a coordinated drawdown of 400 million barrels of crude and refined products. The United States committed 172 million barrels.
The problem now is that emergency reserves are no longer as plentiful.
The US Strategic Petroleum Reserve currently holds roughly 311 million barrels, its lowest level since 1983. The Department of Energy has said that the reserve could technically be drawn down to around 70 million barrels.
But that figure does not necessarily represent a comfortable operating threshold.
Energy traders and Wall Street analysts have generally viewed 250 million to 300 million barrels as a more practical lower limit. As inventories inside the salt caverns fall, pressure declines, making it increasingly difficult and slower to extract crude during an emergency.
The result is a much smaller cushion.
The International Energy Agency also warned in May that commercial inventories and floating storage were being depleted rapidly, leaving only a few weeks of supply.
That is particularly concerning because the market entered the initial crisis with comparatively healthy inventories and a substantial surplus.
Today, the global oil system is starting from a much weaker position.
A supply shock could spread quickly
Low inventories matter because they reduce the market's ability to absorb unexpected disruptions.
A prolonged closure of Hormuz would obviously be serious. But the market does not necessarily need a catastrophe of that scale to experience another sharp price spike.
A major refinery fire, additional drone strikes against energy infrastructure, a temporary disruption at a key export terminal or a prolonged shipping interruption could be enough to trigger panic buying.
Bob Yawger, director of energy futures at Mizuho, recently warned that with tanker traffic restricted through two of the world's most important chokepoints, oil could move rapidly toward its previous four-year high while global inventories continue to drain.
That is the central concern.
The market does not need to lose a huge volume of oil to become destabilized when the available buffer is already thin.
Refining margins send another warning
There is another signal that the oil market is under severe pressure: refining margins.
Known as crack spreads, refining margins measure the difference between the price refiners pay for crude and the value of the gasoline, diesel and jet fuel they produce.
These margins can rise sharply when refined products become scarce, even if crude prices are already elevated.
That is exactly what has happened.
As governments, traders and consumers drew down gasoline, diesel and jet fuel inventories during the Iran conflict, supplies of refined products tightened. Refining margins consequently reached record or near-record levels.
The benchmark US 3-2-1 crack spread, which represents the margin from processing three barrels of crude into two barrels of gasoline and one barrel of diesel, recently climbed to nearly $70 a barrel.
That is close to triple its normal level.
In northwest Europe, refining margins have risen to seasonal highs near $30 a barrel, while European diesel crack spreads have climbed toward $65 a barrel.
These numbers point to a market struggling to keep up with demand for refined fuels.
There is also a feedback effect.
High refining margins encourage refineries to run at or near maximum capacity. That increases competition for crude, which can support higher crude prices even as refiners attempt to replenish gasoline, diesel and jet fuel supplies.
Diesel may be the biggest problem
The diesel market is particularly vulnerable.
Morgan Stanley has warned that European diesel inventories are approaching multi-year lows. The Middle East conflict has tightened supplies further, but the market was already under pressure after Russia restricted diesel exports to protect its domestic market following Ukrainian drone strikes against refineries.
US Energy Information Administration data show that US middle-distillate inventories, which include diesel and heating oil, are about 10% below the five-year seasonal average.
Inventories at strategically important hubs outside the Persian Gulf have also declined sharply. Traders have been drawing down supplies at locations such as the UAE's Fujairah Oil Terminal to compensate for disruptions around Hormuz.
The consequences are already visible at the pump.
The US national average retail diesel price has climbed above $5.13 a gallon, compared with a pre-war baseline of roughly $3.53. Average diesel prices across the European Union have risen to approximately €1.84 to €1.93 per liter.
Diesel is not simply another transportation fuel. It is fundamental to freight, construction, agriculture and heavy industry.
When diesel becomes more expensive, trucking companies face higher operating costs. Those costs eventually move through supply chains and into the prices of food, clothing, electronics and other goods.
Agriculture is especially exposed. Tractors, harvesters, irrigation systems and other farm machinery depend heavily on diesel. Higher fuel prices therefore raise the cost of planting, harvesting and transporting crops.
A prolonged diesel shortage could consequently become an inflation problem well beyond the energy sector.
Airlines face their own fuel squeeze
Jet fuel presents another vulnerability.
Global jet fuel prices have fallen from their spring highs, but they remain volatile because inventories are low and refining margins are elevated.
Jet fuel and diesel are particularly interconnected because both are produced from similar portions of a crude oil barrel. Refiners can adjust their output depending on which product offers the strongest margins.
During the initial phase of the Iran war, refiners increased aviation fuel production to prevent immediate shortages in Europe and the United States. That decision, however, came at the expense of gasoline and diesel inventories.
European structural jet fuel reserves have reportedly fallen to less than a month's supply, leaving airlines with little safety margin.
The global average jet fuel price stood at $149.40 a barrel on July 17, according to the IATA Fuel Price Monitor, up 17.6% from the previous week.
If diesel shortages continue to generate higher margins, refiners could increasingly shift capacity toward diesel production. Airlines would then face greater competition for refinery output.
Fuel is typically an airline's largest operating expense. Higher jet fuel costs can therefore translate into higher ticket prices, fuel surcharges and potentially reduced flight capacity.
Russia stands to benefit
Russia presents a striking contrast to consumers and import-dependent economies.
During the first phase of the US-Iran conflict, the price of Russia's Urals crude surged from roughly $55 a barrel to around $125 in early April.
That increase translated into a substantial boost in Moscow's energy revenues.
Monthly Russian hydrocarbon revenues rose from 393 billion rubles in January to 855.6 billion rubles, or approximately $10.9 billion, in April. Analysts estimate that the conflict generated around 1.18 trillion rubles in additional energy revenue for Moscow between March and June.
The initial revenue surge was partly offset by large government subsidies intended to protect the domestic fuel market. But receipts strengthened again in May and June.
By May, Russian oil and gas revenues had increased nearly 39% year over year. Higher profit-based oil extraction tax receipts during the second quarter provided another boost.
The additional revenue gave the Kremlin greater fiscal flexibility. It allowed the government to cancel planned 10% spending cuts in non-sensitive areas and resume foreign currency purchases to rebuild the National Wealth Fund.
Now, as Urals crude has climbed back toward $84.26 a barrel amid the latest escalation, Russia is once again positioned to benefit from higher global oil prices.
Russian oil and gas revenues are estimated to rise by roughly 60% year over year in July.
The situation is complicated by Ukrainian drone attacks on Russian refineries, which have reduced domestic refining capacity and pushed wholesale fuel prices higher. But from Moscow's perspective, crude that cannot be processed at damaged refineries can still be redirected toward export markets.
India and China remain major buyers of Russian seaborne crude.
So, should we worry about $100 oil?
The headline number itself is not the most important issue.
Oil has crossed $100 before this year. Markets survived it, and prices eventually fell below $70.
The more worrying question is what happens if the world reaches $100 oil with depleted inventories, constrained shipping routes and little strategic reserve capacity left to deploy.
That combination changes the risk calculation.
The first wave of the crisis demonstrated that governments can temporarily stabilize markets by releasing emergency stocks and redirecting supply. But those tools are less powerful when reserves have already been depleted.
At the same time, high refining margins, low diesel inventories and shrinking jet fuel buffers suggest that the stress is spreading beyond crude oil itself.
The global economy may therefore be entering the next phase of the crisis with a much thinner safety net.
A further escalation in the Strait of Hormuz, Bab el-Mandeb or major energy infrastructure could quickly transform a geopolitical crisis into a global energy shock.
The question is no longer simply whether oil can reach $100.
It is how long the world can afford to stay there, and what happens if the next disruption arrives before inventories have time to recover.
Comments
Post a Comment