Global Oil Crisis: When Two Choke Points Threaten the World Economy

In less than one month, analysts have warned about an impending oil glut as oil tanker traffic through the Strait of Hormuz began to recover following the ceasefire agreement between the US and Iran. However, just days after these warnings, the ceasefire has become a painful memory, missiles are once again flying, and now, Yemen's Houthi forces are attacking oil tankers in the Red Sea, creating two blocked choke points and a very real risk of global economic recession.

The Red Sea and Strait of Hormuz Situation: An Energy Nightmare

This week, Brent crude prices surpassed the $100 per barrel mark as reports emerged that Houthi forces had attacked two Saudi oil tankers in the Bab el-Mandeb strait - the route that Saudi Arabia has been using as its primary oil export route due to the blockage of the Strait of Hormuz. Subsequently, oil tankers heading to the Red Sea route have turned back and are using alternative routes, which take more time and cost more.

The Strait of Hormuz typically handles an average of about 20 million barrels of oil per day. Currently, this volume has dropped to a near negligible amount. According to various estimates, the Bab el-Mandeb strait - the second choke point in the Red Sea - had been handling 4 to 5 million barrels of oil per day from Saudi Arabia in recent weeks. Now, this route also appears to be almost completely blocked.

Summary Table of Oil Flow Through Major Choke Points

Impacts from the Black Sea: Kazakhstan Suspends Oil Exports

Meanwhile, Ukrainian drone attacks on the Caspian Pipeline System in the Black Sea have forced Kazakhstan to suspend most of its oil exports. The targets of the drone attacks are the Novorossiysk port on Russia's Black Sea coast, which is also the departure point for most of Kazakhstan's oil exports to the world market.

This week, Bloomberg reported that tanker operators are becoming increasingly concerned about sending their vessels to the Novorossiysk port as Ukrainian drones are also attacking ships at this port.

The Refining Product Crisis: A Separate Challenge

Reality shows that the situation with refined oil products is a separate crisis. "Unlike crude oil, refined products have fewer mitigation options. Many refineries in the Middle East are still affected by continuous conflict, while Russia's diesel export restrictions continue to limit global supply," Ole Hansen, head of commodity strategy at Saxo Bank, noted in an analysis earlier this month.

"Global refining capacity also remains relatively constrained, preventing a rapid increase in crude oil supply from translating into additional diesel and gasoline production," he added.

The result is that global refining margins have reached all-time highs, clear evidence that the global fuel market remains extremely tight, despite millions of barrels of crude oil having left the Strait of Hormuz in the weeks before peace talks between Tehran and Washington failed.

Impact on Demand and Inventories

These crises have begun to affect crude oil and fuel demand. In Europe, where diesel inventories are scarce, consumption fell by 5.7% in May, according to International Energy Agency (IEA) data cited by Reuters. In China, diesel consumption also fell in May, decreasing by 10%, and gasoline demand also fell, but more modestly by 5%.

At the same time, global crude oil inventories are being depleted. "Large strategic releases in the initial conflict have significantly reduced the available buffer for any future disruptions," Mick Strautmann, an analyst at Vortexa, said in early July, as quoted by the Wall Street Journal.

However, the IEA head said there is still plenty of oil in OECD countries' strategic reserves to release if needed. "IEA countries still hold large emergency reserves, including more than 1 billion barrels of government-controlled oil," Fatih Birol said in a statement on the oil market this week.

He added: "There is no room for complacency about oil security in the context of escalating hostilities and the continued decline in commercial inventories."

Global Economic Impact: Real Recession Risk

According to IEA data, global crude oil demand has fallen by nearly 5% in the second quarter of the year, as a natural result of soaring oil prices due to the Middle East war. This is perhaps the clearest sign of a physically tight market, even as warnings about an impending oversupply began appearing in media reports in June.

In this context, it's no surprise that the World Bank (WB) is revising its global growth outlook. The organization's chief economist, Indermit Gill, told Reuters that the WB now forecasts the global economy will grow by just 1.3% this year, down from 2.9% last year.

However, this may be too optimistic if the wars harming energy supply chains continue. Currently, this appears to be the most likely scenario with little appetite for peace. This, in turn, means that the risk of recession is very real.

Conclusion

The global oil situation is facing one of its most serious challenges in decades. With two major choke points blocked, attacks on energy infrastructure, and declining demand due to high prices, the market is entering an extremely unstable period. Policymakers and investors need to monitor the situation closely, as global economic stability may depend on solutions to the ongoing geopolitical conflicts.

Oil prices are likely to remain highly volatile in the coming months, and the impact on inflation and global growth could be prolonged. Major energy-consuming countries need to consider measures to reduce their dependence on oil from unstable regions, while producers need to consider increasing output from more stable areas to compensate for the shortage.

In the current context, the global economic outlook remains fragile, and the risk of recession remains a real threat if the geopolitical situation does not improve in the near future.