Diesel on fire
Inventories are also in a more vulnerable position today. The prolonged disruption at Hormuz has forced consumers to draw on fuel stockpiles during the peak summer demand season in the Northern Hemisphere. As a result, market buffers – which were already slim in June – have shrunk further.
This is particularly true for diesel. One of the most significant developments in the last two months has been the sharp deterioration in global diesel balances. Middle East disruptions have continued to curtail exports, while Russia, one of the world's largest diesel suppliers, shocked markets in July by banning exports after months of Ukrainian drone attacks severely damaged its refining facilities.
These dynamics sent diesel refining margins soaring to an all-time high of $75 a barrel on July 31. Although they have since retreated to around $63, they remain more than 50% above mid-June levels.
This growing stress in the diesel market underscores a broader challenge for oil traders. Even if crude exports from the Gulf partially recover, refining systems remain under acute strain. A reopening of Hormuz may improve crude availability, but it will not quickly resolve shortages of fuels that power much of the world’s freight, manufacturing and agriculture.
The Red Sea
Compounding these concerns is the emergence of another major energy chokepoint.
In June, the market could focus entirely on Hormuz, but now the conflict has expanded to the Red Sea, where Yemen's Iran-backed Houthis last month declared a blockade on Saudi exports.
The Red Sea emerged as a critical alternative export route after the outbreak of the war, particularly for Saudi Arabia. It was able to continue exporting more than 4 million barrels per day, around 60% of its pre-war flows, even as Hormuz was almost entirely shuttered.
The Houthi blockade, coupled with recent attacks on Saudi infrastructure, has significantly disrupted those exports.
Whether the Houthis agree to lift their blockade as part of a broader agreement with Iran remains unclear. Even if they do, the risk that they could reinstate it will hang over the region, constraining U.S. negotiators and complicating the outlook for Middle East producers.
Gulf countries – and much of the rest of the world – are understandably desperate for a lasting settlement in the Middle East. Most will welcome any deal that reduces the immediate risks facing energy markets.
But any interim agreement will leave the issues that sparked the war unresolved – while also leaving Tehran – an unpredictable, aggressive actor – even more emboldened.
Perhaps “this time is different,” but not necessarily in the way traders would like.
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