Global economy is suddenly fighting an energy stranglehold on three fronts

The global economy suddenly finds its energy supplies threatened on three fronts simultaneously: the Persian Gulf, the Red Sea and the Black Sea. The world goes into these disruptions with the lowest levels of oil reserves in years.

Conflict in the Middle East broadened this week with Tehran-backed Houthi militants turning tankers back from the Bab al-Mandeb strait. The Red Sea maritime chokepoint, which has become the biggest export route for Saudi Arabia’s crude following the Strait of Hormuz closure, accounted for roughly 12% of the world’s seaborne oil flows before the war.

Another disruption: Ukraine has mounted sustained attacks on Russian energy infrastructure and ships in the Black Sea. A barrage of strikes in the waters near the port of Novorossiysk, which handles nearly a third of Russia’s oil exports, paused flows through a pipeline that delivers Russian and Kazakh oil to the Black Sea.

The closing of the three chokepoints collectively imperils roughly a quarter of the world’s oil supply and provides a fresh test of the ability of energy-hungry economies to adapt.

Oil is at the heart of two major conflicts consuming the world’s attention. Iran’s ability to starve the world of supply from the Gulf has emerged as its most potent form of leverage against the U.S. Ukraine has increasingly disrupted Russia’s energy exports and domestic fuel markets, giving Kyiv unexpected momentum in the four-year-old conflict.

Four ships sustained damage near the Black Sea pipeline in recent days, including a tanker chartered by Chevron and owned by Greek shipper Aristidis Alafouzos, chief executive of Okeanis Eco. He said the attacks are “a systematic threat to the arteries of the world’s energy supply and to the safety of those who keep them flowing.”

The multipronged crisis comes at a precarious time for energy markets. In the U.S., crude oil inventories—which include commercial stocks and the Strategic Petroleum Reserve—fell by 3 million barrels in the week ended July 17 to reach the lowest level since the middle of the Reagan administration.

Government-controlled inventories in the Organization for Economic Cooperation and Development, a group of mostly wealthy countries, dropped another 44 million barrels in June from the May level, which was already the lowest since December 1990.

“The large strategic stock releases earlier in the conflict have meaningfully depleted the buffer available for any future disruption,” said Mick Strautmann, a market analyst at ship tracker Vortexa.

Crude-oil prices jumped above $95 a barrel on Wednesday for the first time since June 10, before the U.S. and Iran signed their memorandum of understanding.

But the real pain in markets lies in the products refined from crude oil, the gasoline and diesel that power cars, trucks, tractors and jets. Prices at U.S. gas pumps rose above $4 a gallon this week in the midst of summer driving season and are likely heading even higher.

The reason: Two of the world’s largest exporters of refined oil products, Russia and the Middle East, are now crippled by conflict.

Ukraine’s attacks on Russian oil refineries have knocked out a chunk of the refining capacity of the world’s second-largest diesel exporter. Russian crude-processing rates are now at the lowest in more than two decades, averaging less than 4 million barrels a day this month, according to figures compiled by EA Analytics.

After long lines formed at gas stations, Russia banned exports of diesel on July 8 through to the end of July. Russia already had restrictions on shipments of gasoline and jet fuel before the outright ban. The move sent shock waves through a market that relied on Russia for roughly 11% of global diesel exports last year.

“Ukrainian drone strikes have hit every one of Russia’s largest refineries at some point this year,” said Isabelle Gilks, principal analyst of retail fuels at energy consulting firm Wood Mackenzie.

That has taken more than a third of Russian’s capacity offline and Russian diesel exports fell to around half of the level at the same time last year, Gilks said.

“Repairs to Russian refineries are likely to be slow because sanctions make it hard to source replacement parts and specialists,” she said, adding that a less damaging wave of attacks last year took months to recover.

The re-closing of the Persian Gulf has also set back efforts to resupply the world’s fuel reserves. The region had supplied roughly a fifth of Europe’s diesel and half of its jet fuel.

Unlike crude exports that have been partially rerouted through pipelines to the Red Sea or Gulf of Oman, refined products exports have few alternatives to the Strait of Hormuz, analysts said. As a result, crude supply has recovered faster than refined products supply over the past months.

That has left a yawning gap between the price of crude oil and diesel or gasoline. The difference, known in the industry as the “crack spread” named after the cracking process that refines crude into its constituent products, has widened to its highest in years in Europe and the U.S.

“There isn’t enough refining capacity running to turn the available crude into product—which keeps a lid on crude, and at the same time leaves product markets scrambling,” said analysts at Morgan Stanley.

Refiners stand to benefit from the crack spread, which is also a rough measure of their profit margins.

The other big winners are shipowners, who are chartering out their vessels at high rates as fewer ships are available globally.

That dynamic is exacerbated by the situation in the Red Sea. When the Bab al-Mandeb Strait that connects the Red Sea to the Indian Ocean is completely shut, vessels can still get to Asia. But this requires a massive detour north through the Suez Canal, west through the Strait of Gibraltar, and then south around the Cape of Good Hope—adding 10 to 15 days of journey time, according to ship tracker Kpler.

There is another practical barrier. When fully loaded, the VLCCs, or very large crude carriers that can carry 2 million barrels of oil, sit too deep in the water to pass through the Suez Canal. Shippers would have to operate supertankers on partial loads.

These longer and less efficient journeys will tie up more tankers capacity and push up shipping costs for Asian refiners.

A senior Houthi official, Hizam al-Assad, a member of the group’s political bureau, said on X that attempts to bypass restrictions by shipping oil through the Mediterranean is “nothing short of utter stupidity.” He implied that Houthi forces could target Saudi oil-production facilities, something they have done in the past. “The next steps could involve shutting off the tap altogether,” he said.

Write to Rebecca Feng at [email protected] and Costas Paris at [email protected]