RPT-ROI-Cutting off Red Sea oil route may be one crisis too many: Bousso

Further threatening the global economy is the steady depletion of global oil inventories. Strategic and commercial reserves helped cushion the abrupt loss of Middle Eastern supplies during the early stages of the Iran conflict, but those buffers have steadily eroded over months of disruption. That leaves the world with far fewer shock absorbers than it had in February. The latest escalation in the Red Sea therefore represents much more than just another shipping disruption. It threatens the only viable alternative route that kept Middle Eastern oil moving after Hormuz was blocked, exposing just how fragile the market's recovery has been. For months, the oil market managed to adapt to one geopolitical shock after another. The simultaneous disruption of Hormuz and Bab el-Mandeb could push that capacity for adaptation to its limits. And as fuel shortages deepen and demand contracts, the world's energy crisis risks entering a far more damaging and economically painful phase. The expansion of the Iran war to the Red Sea has thrown the oil market another dangerous curveball, choking off a fragile recovery in energy flows. The global economy might increasingly respond to this escalation by slowing down. Nearly two weeks into the renewed conflict between the United States and Iran, tensions in the Middle East rose sharply after the Iran-backed Houthi militia on Monday declared a blockade against Saudi vessels seeking to pass through the Bab el-Mandeb Strait at the southern entrance to the Red Sea. The move severely complicates global oil flows, which were already disrupted by the latest closure of the Strait of Hormuz, the strategic waterway controlling access to the Gulf. Saudi Arabia's Yanbu export hub on its west coast, which depends on the Bab el-Mandeb Strait to supply Asia, its main market, became the kingdom's primary outlet for crude exports after Hormuz – through which 20% of global energy flows used to pass – was largely blocked following the outbreak of war on February 28. The kingdom has exported around 5 million barrels per day from its west coast since March, more than double prewar levels. Roughly four-fifths of those shipments transited through Bab el-Mandeb, according to data from analytics firm Kpler. But what initially appeared to be a successful workaround has become a target. The Houthi blockade is once again forcing a rapid redrawing of global oil trade routes. Many vessels carrying Saudi crude to Asia are avoiding Bab el-Mandeb altogether, instead crossing the Suez Canal into the Mediterranean and then circumnavigating Africa. The logistical complications do not end there. The largest crude carriers cannot transit the Suez Canal fully laden due to depth restrictions. They must first unload part of their cargo into a pipeline south of the canal and then reload the crude near Alexandria before continuing their voyage. All told, avoiding Bab el-Mandeb adds at least four weeks to a typical tanker journey, more than doubling normal sailing times while sharply increasing freight and insurance costs. Those soaring fuel prices are increasingly feeding through into consumption patterns. Global oil demand fell by nearly 5% in the second quarter of 2026 from a year earlier to 99.1 million bpd, according to International Energy Agency estimates. The declines have been uneven across regions and mostly concentrated in Asia and Europe. Chinese diesel consumption fell an estimated 10% in May from a year earlier, while gasoline demand declined 5% and petrochemical feedstock use slumped 17%, according to IEA estimates. In Europe, diesel consumption fell 5.7% in May from a year earlier to 4.5 million bpd, according to preliminary IEA data. Reduced fuel consumption typically reflects lower economic activity. While economies can shift to other energy sources over time, the immediate response to spiking fuel prices is demand destruction. Reflecting this risk, World Bank chief economist Indermit Gill told Reuters that the conflict in Iran could ultimately cut 2026 global growth to as low as 1.3%, from 2.9% last year. Of course, there are short-term workarounds to soften the blow. India appears to be ramping up refining rates of Russian crude. But the more oil routes are cut off, the more energy flows are redirected and the longer the disruption persists, the worse the economic pain could get. This disruption in crude deliveries deals a major blow to the global refining sector, the current pain point in the world’s energy system. Asian refining output plummeted during the crisis and had only recently begun recovering amid the rise in Gulf crude exports following the signing of a U.S.-Iran interim ceasefire on June 17. China's refiners slashed processing rates by 18% in June compared to the same month in 2025, pushing output to the lowest level since the early days of the pandemic in March 2020. The world’s largest oil importer sharply reduced crude imports and fuel exports to safeguard supplies and shield itself from soaring energy prices. Any nascent recovery in China's refining operations will now likely stall given the renewed supply disruption and rise in oil prices above $90 a barrel, the highest in over a month. The world's other major conflict has also throttled the refining sector. Ukraine’s relentless drone attacks on Russia's energy infrastructure in recent months have severely curtailed refinery operations and forced Moscow to ban diesel exports, removing another key source of supply from global markets. Because of this squeeze in refining capacity, fuel is coming under far greater pressure than crude itself. Since the start of the Iran war, benchmark European diesel prices and U.S. gasoline prices have gained around 65%, compared with a 30% rise in Brent crude. Diesel refining margins have also surged to record levels, underscoring the growing imbalance between crude availability and the supply of refined products.

RPT-ROI-Cutting off Red Sea oil route may be one crisis too many: Bousso

Market buffers are wearing thin

Red Sea blockade disrupts oil flows

Demand destruction and weaker growth risks

Recovery in refining stalls as fuel prices jump

Related News

Suburban Propane Partners declares quarterly distribution of $0.325 per unit

Xeris Biopharma to report Q2 results, host conference call

Applied Materials schedules fiscal Q3 earnings call

CMS Energy Corp <CMS.N>: KeyBanc Cuts to Sector Weight From Overweight

Rockwell Automation partners with Augury on agentic AI for industrial maintenance workflows