The specter of multiple energy chokepoints closing simultaneously is casting a long shadow over global markets, with ongoing conflicts in key oil-producing regions creating a complex and precarious situation. While diplomatic efforts between the U.S. and Iran have temporarily quieted hostilities in the Persian Gulf, the broader landscape suggests a period of sustained volatility. The Strait of Hormuz, a critical transit point for a significant portion of the world’s oil, remains a focal point of concern, particularly as regional neighbors express apprehension over any agreement that might solidify Tehran’s influence over the narrow waterway. This geopolitical tension is compounded by the actions of Iran-backed Houthi rebels, whose threats to shipping in the Bab el-Mandeb Strait have already forced adjustments in Saudi Arabian oil export routes, pushing some traffic towards the Suez Canal.
However, the Suez Canal, while offering an alternative, presents its own set of limitations, notably its inability to accommodate the largest crude oil tankers. This leaves a vulnerability that, according to Helima Croft, head of global commodity strategy at RBC Capital Markets, could lead to “no way out scenarios” should further disruptions occur. The potential for Iran to target the Suez Canal, though speculative, underscores the fragility of existing workarounds. Beyond the immediate concerns in the Middle East, the conflict in the Black Sea adds another layer of complexity. Ukraine’s attacks on Russian oil infrastructure, including refineries and tankers, have significantly impacted the supply of refined products, particularly diesel, of which Russia is a major global producer. Damage to these facilities has already led Moscow to ban exports to meet domestic demand, tightening the product market considerably.
The current situation, described by Croft as an “everything everywhere all at once” scenario, extends even to the Caspian Sea, where a recent Ukrainian strike on an Iranian vessel suspected of ferrying military supplies between Iran and Russia highlights the interconnectedness of these regional conflicts. Yet, beneath the surface of crude oil concerns, the crisis in refined fuels presents an even more immediate and acute challenge. Susan Bell, senior vice president of downstream research at Rystad Energy, pointed out a critical disparity in stockpiles. At the outset of the Iran war, global commercial and strategic crude oil inventories stood at 4.4 billion barrels, while refined products like gasoline, diesel, and jet fuel totaled only about 1.4 billion barrels. Although both have seen draws of approximately 200 million barrels since then, the much lower starting point for refined products means their margin for error is significantly smaller.
This scarcity is reflected in exploding crack spreads – the difference between crude oil prices and fuel prices. Bell noted that the U.S. gasoline crack spread, which was around $8 a barrel at the start of the conflict, has now surged to between $40 and $50. This demonstrates the intensifying pressure on product stocks. For President Donald Trump, navigating this second phase of the Iran war with oil prices flirting with $100 per barrel presents a difficult challenge, as many traditional policy levers have already been pulled. Emergency reserves globally have been largely depleted, and a gas tax holiday, a common measure, would require congressional approval that seems unlikely given the current political climate. Furthermore, U.S. oil producers and refiners are already operating near peak capacity, and the administration has already waived the Jones Act to facilitate fuel movement along U.S. coasts.
The potential for a severe escalation looms large. Dan Pickering, founder of Pickering Energy Partners, warned that a de-facto closure of both the Bab el-Mandeb and the Strait of Hormuz could easily push oil prices back towards the late-April high of $124 per barrel as early as August. He emphasized the lack of time for a gradual response, stating, “We don’t have multiple months because we’re already starting from a tougher spot. It’s going to be on us pretty quickly.” The confluence of these regional conflicts and the inherent vulnerabilities in global energy supply chains suggests that the coming months could see significant market turbulence, particularly in the already strained refined products sector.
