PNN – The oil market had shown remarkable resilience during the first phase of the war, but it now faces its greatest threat.
According to the report of Pakistan News Network; a CNN analysis explains how the oil market in the second phase of the war lacks the protective buffers that existed during the first phase.
CNN notes that while the oil market demonstrated strong resilience during the initial phase of the war, that stability is now facing its most significant threat since the conflict began.
According to this analysis, the energy industry’s innovative and remarkable strategies for navigating history’s largest oil shock had—up to that point—shielded consumers from the crisis of inflation and eroding purchasing power.
During the initial phase of the war against Iran, crude oil prices reached alarming levels, yet they never approached the $128-per-barrel mark (recorded in 2022) or the all-time high of $146 (seen on the eve of the 2008 Great Recession).
CNN reports that immense pressure is now building in the Middle East, and this fresh surge in tensions could push oil prices beyond these critical and alarming levels.
Helima Croft, Head of Global Commodity Strategy at RBC Capital Markets, says: This conflict has entered a far more dangerous phase. This situation could completely alter the outlook of those who believed the market would always find a way to navigate around problems.
On Thursday, oil prices crossed the $100 mark for the first time since May. Gasoline prices in the U.S. have now risen above $4 per gallon, while diesel has climbed to over $5.20 per gallon.
The bond market indicates that concerns regarding inflation are now more acute than at any other time during Donald Trump’s second term.
This analysis highlights that the very factors which had prevented a sharp spike in oil prices over the past five months have either weakened or vanished entirely, and the monster of high oil prices is breaking free from all its restraints and shackles.
1- The Challenge of Oil Export and Transit
Past Scenario: Oil shipments bypassed the conflict zone via the Red Sea.
Current Scenario: Oil arteries at two critical chokepoints are facing blockages.
Attacks on oil tankers in the Strait of Hormuz have halted the majority of tanker traffic through this vital waterway. According to JPMorgan, the market responded innovatively, rerouting approximately 7 million barrels of oil per day—which would normally transit the Persian Gulf—through pipelines toward the Red Sea.
However, Capital Economics points out that these pipeline alternatives have now also become vulnerable. The blockade of the Bab el-Mandeb Strait by Yemeni forces has blocked another of Saudi Arabia’s oil export routes, accounting for approximately 5 million barrels per day.
Saudi Arabia could reroute this oil northward via the Suez Canal; however, Natasha Kaneva, Head of Global Commodities Strategy at JPMorgan, notes that the largest oil tankers cannot traverse this route due to water depth limitations. Even if the oil were transferred to smaller tankers, rerouting via the Mediterranean and around the African continent would turn a standard four-week voyage into an eight-week journey.
2- Insurance Coverage
Past Scenario: Insurance companies charged ships hefty premiums labeled as “war risk” fees.
Current Scenario: Insurance policies no longer cover ships that pay transit fees to Iran.
Vessels intending to exit the Strait of Hormuz during the war had to accept steep insurance rates—but at least they could secure coverage. On Thursday, the Lloyd’s Market Association (LMA), which represents marine insurance underwriters, cast doubt on the future availability of insurance policies for ships exiting the strait.
Iran has announced plans to impose a transit fee of $1 to $2 per barrel of oil—a move that would generate millions of dollars in revenue per tanker. In a new clause added to maritime insurance policies, the Lloyd’s market has emphasized that this practice poses an unacceptable risk: paying such fees to Iran is illegal due to violations of U.S. sanctions.
Paying these fees could void a vessel’s entire insurance policy, creating an extreme risk for shipping companies. According to CNN, Iran’s insistence on its right to attack ships attempting to exit without paying the fee leaves vessels with virtually no way out of the strait.
3- Widening Scope of the Crisis
Previous Narrative: The oil dispute was confined to the Middle East.
New Narrative: Russia has become a major part of the energy crisis.
Ukrainian drone attacks on Russian refineries and the Caspian Pipeline Consortium terminal on the Black Sea have created a significant new problem for the global energy market.
These attacks caused severe fuel shortages within Russia, compelling the country to ban diesel exports. According to Andy Lipow, president of Lipow Oil Associates, this move removed a massive volume of fuel from the market; prior to the ban, Russia exported 800,000 barrels of diesel daily, accounting for 12 percent of total global diesel shipments.
Ukrainian attacks in the Black Sea have also disrupted crude oil supplies at the worst possible time. Although this pipeline does not transport massive volumes of oil, there are fears that it could remove 1.7 million barrels per day from the global market—precisely when alternative routes to the Strait of Hormuz are becoming blocked.
4- Strategic and Commercial Inventories
Past Narrative: The world was facing an oil supply surplus.
Current Narrative: Crude oil inventories have dropped to critically low levels.
The most fundamental difference between the onset of the Iran war and current conditions lies in the volume of oil held in global storage and reserves. According to Dan Pickering, Chief Investment Officer at Pickering Energy Partners, crude oil inventories were at historic highs prior to the war but have since fallen by 1.3 billion barrels over the past five months.
This situation presents a particular crisis for the United States: the U.S. Strategic Petroleum Reserve (SPR) has declined by 116 million barrels since the spring, reaching its lowest level since 1983. These reserves are now just 60 million barrels away from the minimum floor mandated by Congress.
U.S. commercial inventories are also approaching their operational minimum—a level where the laws of physics no longer allow oil companies to move crude through pipelines using gravity alone. Trump noted in June that this situation could trigger an “economic disaster”—one that would draw comparisons between him and Herbert Hoover, the president who presided over the Great Depression.
Furthermore, there is no prospect this time of the market being rescued by oil trapped in the Strait of Hormuz. Back in June, during a brief truce, more than 200 million barrels of oil moved through the strait. However, according to Navin Dass, an analyst at Kpler, only 44 vessels are currently present in the strait, down from 97 just prior to the signing of the memorandum of understanding.
5- A Race against Time
Past Narrative: China held sufficient oil reserves to weather the crisis.
New Narrative: China cannot hold out indefinitely.
Demand for oil has collapsed over the past five months—largely because China had the foresight to stockpile oil before the war began, thereby avoiding the need to import at high prices.
However, China cannot rely on its reserves to this extent for long. According to Kanwa, the country has only about three to four months left before it is forced to increase imports.
Consequently, the oil market is now engaged in a race against time. Prices have remained relatively contained, given the tight supply-demand fundamentals; the drop in demand has largely managed to offset supply constraints.
However, according to Dan Struyven, Head of Oil Research at Goldman Sachs, prices will continue to rise if the current situation persists. He believes that oil prices could retest the 2022 peak—surpassing $120 per barrel—by October.