Sadly, it seems we have been right to worry since February that the world could be facing a major energy crisis.
Brent is now back to $100/bbl, after the brief pause during the Hormuz ‘ceasefire’. And Russia’s refineries and shipping are being hit by Ukraine.
So oil seems set to go higher – perhaps much higher, as the Bloomberg chart shows:
- This is already increasing interest rates
- The US 10-year rate is now back to 4.7%
- Transport fuel prices are also heading higher
And it is hard to see any way of quickly refilling the supply chains again.
IRAN IS NOW STARTING TO CLOSE BOTH SEA ROUTES
Last week saw a new front open in the Middle East.
Iran’s allies, the Houthis, began to close the Bab El-Mandeb Strait as the Bloomberg chart shows:
- It has been a critical route for Saudi oil exports
- The oil was being piped to Yanbu and then loaded into tankers for Asia
- 2 Saudi tankers have already been hit by missiles
- The Strait is also the main route for Chinese-Europe container ship movements
MOVEMENTS THROUGH THE STRAITS HAVE VIRTUALLY STOPPED
Since the war began, at least 59 commercial ships have been attacked, and 17 seafarers have died.
And transits through both Straits have dropped close to zero, as the charts from Lloyds List Intelligence confirm.
This is creating near-chaos for many oil and chemical producers. They are desperate to move their product to market as Bloomberg also reports:
“Sinokor Group, the world’s largest owner of supertankers, offered six months extra salary to its seafarers, to pick up oil from either Saudi Arabia or Iraq and unload it in the Gulf of Oman. The round trip would take about a month”:
- Insurance rates have also jumped from 1% – 3% of hull value earlier this month
- They have now reached 7.5% – 10% today, according to S&P Global:
- The insurance cost for a VLCC with 2mb of oil at $100/bbl has now reached $20m
UKRAINE HAS HIT RUSSIAN REFINERIES 2500KM FROM ITS BORDER
Russian oil and product output is also now being hit by Ukraine, as we discussed 2 weeks ago.
Russian refinery runs (important for diesel supplies) have tumbled to just 3.8mbd, a 21-year low, versus 6.8mbd nameplate capacity .
Its drones have hit the Omsk refinery, 2500km (1600 miles) from the Ukrainian border as Militarnyi’s photo shows. They are also sinking ships from the ‘shadow fleet’ carrying Russian oil and products.
As the BBC’s Russia editor, Steve Rosenberg reports:
“The ban on exporting oil products, a rise in production and imports of fuel have helped to steady the situation. But on the domestic market, a tense situation remains, first and foremost in Siberia and the Far East.”
DRONE WARFARE IS HARD FOR MAJOR POWERS TO COMBAT
The key issue is that Ukraine, and now Iran, are changing “the rules” of warfare:
- They are using cheap drones to attack targets worth millions and billions of dollars
- Ukraine is now eyeing a major defense partnership with the USA, as Radio Free Europe reports
- At the same time, Iran continue to be helped by Russia, as Reuters reports
The problem is that there is no easy offramp for the USA and Iran. As we noted on 22 February, before the Iran war started, the BBC was warning:
“The greatest danger now is that President Trump, having amassed this powerful force close to Iran’s borders, decides he must act or lose face, and a war begins with no clear end-state and with unpredictable and potentially damaging repercussions.”
Today, this seems a prophetic judgement:
- If Trump now walks away, he will leave Iran with control of Hormuz
- But he will need a lot of ‘boots on the ground’ to invade a country of 93 million people
- As history confirms, air power alone is unlikely to win the war