A dangerous new phase of war is breaking all the oil market’s constraints

Key Points:

• The oil market faces its biggest threat since the start of the Iran war, with escalating Middle East tensions potentially pushing crude prices beyond previous highs of $128 per barrel in 2022 and the 2008 record of $146 per barrel.
• Key oil transit routes are being choked: Iran’s attacks have frozen crude traffic through the Strait of Hormuz, while the Houthi blockade of the Bab-al-Mandeb strait is blocking Saudi oil exports, limiting alternative pipeline workarounds.
• Insurance challenges have intensified as maritime insurers may refuse coverage for vessels paying Iran tolls, which violates US sanctions, effectively trapping ships and increasing risks for oil transportation.
• The conflict's scope has widened with Ukrainian drone attacks on Russian refineries and pipelines causing fuel shortages and export bans, removing significant diesel supplies from the global market amid already tightening oil inventories.
• Global crude inventories have plummeted by 1.3 billion barrels in five months, with US reserves near historic lows, while China’s stockpiles can only sustain reduced demand for another three to four months, setting the stage for sharply rising oil prices potentially exceeding $120-$150 per barrel if the conflict escalates.