The first blow was absorbed by strategic reserves, falling Asian demand, and temporary bypass routes. Now, inventories are exhausted, the Strait of Hormuz and the Red Sea are tightening simultaneously, and Russia is transforming from a major fuel exporter into a source of fresh deficit.
On July 23, Brent crude closed above 100 dollars per barrel for the first time since May, reaching 100.69 dollars. By the very next day, quotes had retreated to approximately 97 dollars, but this drop did not signal a return to calm: individual physical crude grades approached 110 dollars. The market did not settle down; it merely demonstrated how volatile the pricing mechanism has become when a single attack on a tanker, a single strike on a terminal, or a single rumor of negotiations can alter the cost of the global economy's key commodity within hours.
However, the primary threat is not hidden in the price of crude oil. Crude oil by itself does not fuel airplanes, propel trucks, power tank units, or provide farmers with diesel for the harvest. Positioned between the wellhead and the end consumer is oil refining - a complex, capital-intensive, and extremely vulnerable system. It is precisely here that two wars now intersect: the American conflict with Iran blocks deliveries from the Persian Gulf, while Russia's war against Ukraine hits home with strikes on Russian refineries, storage facilities, and export infrastructure.
The global market is no longer facing a simple shortage of barrels. It is confronting a deficit of routes, refining capacity, insurance coverage, available tankers, gasoline and diesel inventories, and, above all, time. The initial shock was stretched out across time and partially concealed in statistical data. The second shock could prove far more severe precisely because the previous safety cushion has already been spent.
The Market Survived Not Out of Strength, But by Eating Away at the Future
The war began on February 28, 2026, with American and Israeli strikes on Iran. Following the virtual halt of maritime traffic through the Strait of Hormuz, the market anticipated a scenario akin to 1973 or 1979: uncontrolled price growth, panic buying, and a global recession. The magnitude of the threat was indeed unprecedented. Prior to the war, roughly 20 million barrels of crude oil and refined products passed through Hormuz daily - about one-fifth of global consumption. Furthermore, over 20 percent of the world's liquefied natural gas trade, primarily from Qatar, passed through the strait.
Nevertheless, Brent crude prices failed to hold at 150 dollars, let alone 200 dollars. According to data from the International Energy Agency, the global market received several temporary shock absorbers simultaneously. Agency member countries agreed to the largest collective release in history, unlocking 400 million barrels from emergency reserves. The United States raised production to record levels. Saudi Arabia and the United Arab Emirates increased the use of pipelines that allow partial bypass of Hormuz. Suppliers from the United States, Canada, Brazil, Kazakhstan, and Venezuela scaled up exports to Asia. China, Japan, South Korea, and India sharply reduced imports and refining, effectively destroying a portion of the demand the market could no longer satisfy.
This appeared to be resilience, but in essence, it was the mobilization of stockpiles and forced consumption cuts. In March and April, observed global oil inventories shrank by approximately 250 million barrels. In May, they contracted by an additional 143 million. Chinese seaborne oil purchases fell by 3.6 million barrels per day from February to April. Imports into Japan decreased by roughly 1.9 million barrels per day, South Korea by 1 million, and India by 760 thousand. This is not normal market balancing; it is an emergency contraction of the world's largest energy framework.
Therefore, the assertion that the world weathered the first blow with relative ease holds true only for the upper tier of the global economy. Wealthy nations sold off reserves accumulated over decades, subsidized fuel, rerouted tankers, and borrowed money to support consumers. Poorer importing nations paid a different price: reduced air travel, household gas shortages, and rising prices for food, fertilizers, and transport. The initial crisis did not vanish; it was redistributed from financial markets to the most vulnerable societies.
Hormuz Proved to Be a Kill Switch for the Global Economy Rather Than a Strait
The geography of Hormuz makes it a unique pressure point. During the first half of 2025, approximately 20.9 million barrels per day of crude oil and liquid hydrocarbons transited the strait. Around 89 percent of the crude oil and condensate was bound for Asian markets. China, India, Japan, and South Korea collectively received nearly three-quarters of these flows. Conversely, the United States imported only about 400 thousand barrels per day through Hormuz - roughly 2 percent of its own petroleum liquids consumption.
This asymmetry explains the political mechanics of the conflict. For Washington, Hormuz is primarily a matter of freedom of navigation, credibility of American guarantees, and control over the international order. For Beijing, Delhi, Tokyo, and Seoul, it is a physical issue of supply. Iran utilizes the strait precisely because it can inflict global economic damage without entirely halting its own exports or engaging in a symmetrical naval conflict with the United States. Making passage dangerous, unpredictable, and expensive is sufficient.
Even a formally open strait can be economically semi-closed. Shipowners evaluate the likelihood of a vessel being hit, the availability of insurance, the war risk premium, crew detention risks, and evacuation feasibility rather than the legal status of a route. If insurance rates multiply, or if tankers turn off transponders, wait for transit clearances, or hug the Iranian coastline, physical flow drops without an official blockade.
In June, following the signing of an interim American-Iranian memorandum, shipments began to recover. Crude oil exports from Persian Gulf nations, including bypass routes, rose by 6.5 million barrels per day to reach 16.1 million. Yet a massive gap remained compared to the pre-war level of about 24 million barrels per day. Following a new round of hostilities in July, the market realized once more that the temporary agreement opened the strait without removing the cause of its closure.
Bypassing Hormuz Leads Directly Into a New Trap
Saudi Arabia and the UAE do possess pipelines capable of transporting a portion of their crude outside the Persian Gulf. The Saudi East-West Crude Oil Pipeline connects fields in the eastern region to the port of Yanbu on the Red Sea. Its baseline capacity is estimated at around 5 million barrels per day, and following upgrades, certain estimates permitted a temporary throughput of up to 7 million. The UAE can transport roughly 1.5 million barrels per day via a pipeline to the Fujairah terminal on the coast of the Gulf of Oman.
However, these capacities cannot replace Hormuz. First, their combined throughput is significantly lower than the standard flow through the strait. Second, pipelines do not solve the challenge of subsequent maritime delivery. Saudi crude arriving at Yanbu must transit the Red Sea and the Bab-el-Mandeb Strait or travel around Africa. It was precisely at this point that the Houthi movement entered the conflict.
In late July, the Houthis declared a maritime blockade on Saudi shipments and announced attacks on two Saudi oil tankers. The threat transformed the bypass route from a solution into a fresh point of risk. Even before the current escalation, attacks in the Red Sea that began in late 2023 had reduced oil flow through Bab-el-Mandeb from roughly 9.3 million barrels per day in 2023 to 4.2 million in the first half of 2025. A substantial portion of vessels had already diverted to the Cape of Good Hope route.
The outcome is an increase not only in insurance rates, but also in hidden demand for shipping tonnage itself. A voyage from Yanbu to China via the standard route takes slightly over 20 days. Routing around Africa can extend the journey to over 50 days. The same tanker completes fewer round trips per year, meaning the global fleet effectively loses transport capacity even without the loss of a single vessel. Oil may physically exist, yet arrive too late and at too high a price.
The Primary Deficit Begins After the Oil Is Unloaded
In June, global oil production recovered by 4.1 million barrels per day to reach 98.8 million. Nevertheless, it remained 9.4 million barrels below pre-war levels. The situation in oil refining looked even worse. According to International Energy Agency data, global refinery throughput in June was 6 million barrels per day lower than the previous year. Export refineries in Persian Gulf nations had not resumed full operations, Russian capacity was constrained by strikes, and Asian facilities operated at reduced utilization.
This is precisely why the crude market and the refined products market began operating in separate realities. In early July, crude prices softened on expectations of supply recovery, but refining margins for gasoline and diesel rose to four-year highs. By mid-month, analysts estimated the global decline in refined product output at approximately 5 million barrels per day compared to the prior year.
Such a disconnect is more dangerous than a standard rise in crude prices. Crude oil is only partially interchangeable: different grades possess varying density and sulfur content, and every refinery is configured for a specific slate of raw material. Refined products are even less interchangeable. The European automobile fleet relies on diesel, aviation depends on jet fuel, and the chemical industry relies on naphtha and liquefied petroleum gas. A deficit in one product cannot be instantly covered by a surplus in another.
Furthermore, a refinery cannot be restored by a political statement. Damaged primary distillation units, hydrocrackers, fluid catalytic crackers, or desulfurization units require specialized equipment, engineering crews, and months of repair work. Even after a ceasefire, tanker flows may recover faster than the production of gasoline, diesel, and jet fuel. Consequently, crude oil prices may decline well before the fuel crisis ends.
Ukrainian Drones Turned the Russian Rear Into Part of the Global Energy Front
Russia entered the war against Ukraine as one of the world's largest suppliers not only of crude oil, but also of refined petroleum products. Its nominal refining capacity was estimated at approximately 6.9 million barrels per day. Prior to the full-scale war, Russian refineries produced roughly twice as much diesel as the domestic market required, exporting about half of their output. Russia was also a major supplier of fuel oil, naphtha, and vacuum gas oil.
By 2026, Ukraine altered its strike logic. The objective became not merely reducing Russia's oil revenues, but destroying its capacity to convert crude oil into military and civilian fuel. From January through May, Ukrainian drones struck at least 16 Russian refineries. According to one estimate, directly disabled capacity reached roughly 700 thousand barrels per day. Broader calculations accounting for emergency shutdowns and damaged processing units indicated that primary distillation capacity up to 2.85 million barrels per day was temporarily affected.
Strikes on the Moscow, Ryazan, Omsk, and other refineries converted the systemic redundancy of Russian refining into a vulnerability. The Moscow Refinery, which processed around 230 thousand barrels per day and supplied the capital region, lost both of its primary processing units following a June attack. According to industry sources, repairs could stretch at least until the end of the year. In early July, gasoline production in Russia dropped to approximately 65 percent of normal seasonal consumption. Moscow began reallocating fuel from Siberia, increasing supplies from Belarus, and seeking import cargoes from India.
On July 8, the government banned diesel exports through the end of the month, including shipments by producers. Seaborne exports of diesel and gasoil in June had already fallen by about 39 percent compared to May, dropping to 1.8 million metric tons, representing a year-over-year decline of nearly 46 percent. European diesel margins surged to record levels following the announcement of the ban.
A paradox emerges here. Strikes on refineries can increase exports of Russian crude oil because fewer domestic options remain to process it internally. Yet the global market simultaneously loses finished fuel, which is far harder to replace. Russia can earn revenue on pricier crude while losing refining margins, facing domestic fuel lines, and importing products it previously sold itself. For the Kremlin, this is a political issue as well as an economic one: gasoline shortages transport the war directly from the front line into the daily lives of Russian regions.
China Saved the Market at the Cost of Unprecedented Self-Restraint
China served as the second shock absorber during the initial disruption. In June, its crude oil imports fell to 7.12 million barrels per day - a near ten-year low and 41.3 percent below June 2025 levels. Refining throughput contracted to 12.47 million barrels per day, while capacity utilization dropped to approximately 57.7 percent. Authorities restricted fuel exports to safeguard domestic supply.
Beijing was able to afford this maneuver due to massive stockpiles. According to U.S. Energy Information Administration estimates, China's strategic reserves stood at approximately 1.54 billion barrels in the first quarter of 2026. China also substituted coal for a portion of its gas demand, curtailed refining, leveraged the growth of its electric vehicle fleet, and reduced petrochemical demand.
However, this resource is not infinite. In June, Chinese crude oil inventories shrank by approximately 41 million barrels according to International Energy Agency estimates. Imports cannot be kept at minimums indefinitely without subsequent inventory replenishment. Furthermore, Chinese refiners are beginning to respond to record refining margins: July exports of light and middle distillates were expected to nearly double June levels. Beijing faces a choice between domestic energy security and profiting from the sale of scarce fuel.
China is already increasing purchases of Russian crude for September delivery and assessing new cargoes of Iranian raw material. This deepens the reliance of Moscow and Tehran on a single buyer while simultaneously rendering China the ultimate arbitrator of the sanctioned oil market. The longer Hormuz and the Red Sea remain blocked, the larger the discounts Beijing can demand, and the greater the political concessions it can secure from suppliers.
Yet China cannot indefinitely act as a global shock absorber. Its import reduction in the first phase of the crisis helped contain prices, but a recovery in Chinese demand coincides with the Northern Hemisphere summer season, low product inventories, and renewed escalation. What rescued the market yesterday could become an additional source of pressure tomorrow.
The Western Safety Cushion Is Depleting Faster Than It Can Be Replenished
On March 11, 32 member countries of the International Energy Agency agreed to release 400 million barrels - the largest collective intervention in the organization's history. By July, nearly three-quarters of this volume had been delivered to the market. The United States alone contributed approximately 172 million barrels as part of the coordinated drawdown.
The U.S. Strategic Petroleum Reserve declined from roughly 415 million barrels in February to 311.4 million by July 17. Commercial crude inventories stood at 411.7 million barrels, sitting 6 percent below the five-year average. Gasoline stocks were 7 percent below their five-year average, while distillate stocks were down by 10 percent.
Across OECD nations, inventories shrank by an additional 62 million barrels in June, with government-controlled reserves accounting for roughly 44 million of that total. Formally, several billion barrels of crude oil and refined products remain in commercial and strategic storage worldwide. However, not every barrel is immediately accessible. A portion of reserves constitutes minimum operational inventory, some stocks are located far from target markets, certain volumes do not match the processing configurations of specific refineries, and governments retain a portion against the prospect of an even graver crisis.
Another trap emerges: once the conflict concludes, reserves will need to be replenished. Market participants estimate that restoring government stockpiles could add between 500 thousand and 660 thousand barrels per day to global demand in 2027. Consequently, the world will be purchasing oil not only for real-time consumption, but also to rebuild the insurance policy it has consumed. Even a peaceful settlement will generate additional demand, limiting the depth of any future price decline.
Inflation Returns via Gas Stations, Ports, and Food Markets
In its July forecast, the International Monetary Fund projected global economic growth of 3 percent in 2026 and 3.4 percent in 2027. Global inflation was revised upward to 4.7 percent. However, these calculations relied on the assumption that Hormuz would begin a sustained reopening in July, with full normalization achieved by March 2027. The forecast factored in an average oil price of approximately 89 dollars per barrel.
The new escalation renders this assumption fragile. On July 23, Brent crude closed above 100 dollars, European natural gas surged by nearly 60 percent over a brief period, and the yield on ten-year U.S. Treasury bonds approached 4.7 percent. The energy shock has once again begun translating into an interest rate shock: markets are pricing in the risk that the Federal Reserve and the European Central Bank will keep interest rates higher for longer or even resume rate hikes.
For Europe, this represents a particularly dangerous combination. The IMF expects eurozone growth to slow from 1.4 percent in 2025 to 0.9 percent in 2026, alongside an acceleration in inflation from 2.1 to 2.9 percent. Europe is far more dependent on energy imports than the United States, and its industrial sector is highly sensitive to the cost of gas, diesel, and electricity. Elevated interest rates suppress investment, while elevated fuel prices drive up production costs. This is a classic stagflation corridor.
For developing economies, the impact is even more severe. The World Bank warned that a deeper energy disruption and financial stress could cause global growth in 2026 to fall to 1.3 percent, while inflation could rise to 4.4 percent. The Bank projected a 24 percent increase in global energy prices and a 31 percent surge in fertilizer prices. Expensive diesel inflates the cost of plowing, irrigation, harvesting, and transport. Expensive natural gas drives up the price of nitrogen-based fertilizers. Subsequently, an energy crisis converts into a food crisis - with a lag of several months, by which time political attention has often shifted elsewhere.
Who Profits From the Crisis, and Who Pays for Others' Wars
The primary short-term winners reside outside the conflict zone. Producers in the United States, Canada, Brazil, and other Atlantic Basin nations are reaping higher prices and securing new markets in Asia. American production reached a record 13.93 million barrels per day in 2026. Indian refineries, absorbing record volumes of Russian crude, increased exports of refined petroleum products in July to approximately 1.55 million barrels per day - nearly double their May low. Strong refining margins transform processors with access to feedstock and secure ports into the core beneficiaries.
Tanker owners, insurance intermediaries, oil traders, and companies possessing available storage capacity are also benefiting. The longer the trade routes and the higher the uncertainty, the more expensive logistics become, driving up the premium for prompt delivery.
Yet the strategic winners are far less clear. Iran gains leverage, yet pays a price in infrastructure destruction, reduced official exports, and growing reliance on China. Saudi Arabia benefits from high crude prices, but loses its standing as a reliable supplier if Hormuz, the Red Sea, and the Yanbu terminals are threatened simultaneously. Russia garners additional revenue from high crude prices, but its refining sector, domestic market, and fuel exports are being disrupted. The United States solidifies its status as the leading producer, yet the American consumer faces fuel prices above four dollars per gallon, while U.S. President Trump confronts inflation and the political toll of a drawn-out conflict.
Ukraine achieves a rare strategic outcome: strikes using relatively low-cost drones against Russian refineries alter not only Moscow's military logistics, but also the global diesel balance. However, this success carries a downside. The severe global fuel deficit increases pressure on Western governments to curb escalation and protect domestic markets. Military effectiveness can generate political constraints for Ukraine itself.
The primary losers are importing nations lacking reserves, domestic refining capacity, and strong currencies. India is shielded by its large refining sector, yet vulnerable as an importer of nearly 80 percent of its oil consumption. Japan and South Korea possess strategic stockpiles and financial resources, but remain heavily reliant on seaborne deliveries. Nations in Africa and South Asia frequently lack both assets. For them, the crisis is not reflected in a Brent crude chart, but in power plant outages, canceled flights, cooking gas shortages, and rising bread prices.
Four Scenarios: From Costly Instability to a Chain Reaction of Restrictions
The first scenario is a prolonged state of "neither war nor peace." Shipping through Hormuz partially continues, but remains expensive and irregular. Houthis periodically attack Saudi vessels, a portion of the maritime fleet routes around Africa, and Russian refineries continue to experience disruptions. Under these conditions, Brent crude could fluctuate within a wide band, with gasoline and diesel appreciating faster than crude oil. This represents the most probable and politically convenient scenario for the parties involved: none concedes defeat, yet all retain levers of pressure.
The second scenario involves a simultaneous sharp reduction in traffic through both Hormuz and Bab-el-Mandeb. In this case, Saudi Arabia's bypass pipelines cease to function as an effective safety buffer. A physical deficit merges with a shortage of tankers and insurance coverage. Even with available oil in the United States, Brazil, or West Africa, logistics cannot adapt quickly enough to replace lost Middle Eastern volumes. Raw material prices climb significantly above 100 dollars once more, and refined product shortages become global.
The third scenario entails a U.S.-Iranian agreement and a sustained reopening of Hormuz. This would swiftly erase the geopolitical premium built into crude oil prices, but it would not return the market to baseline stability. Mine clearing, terminal repairs, field restarts, refinery restorations, and the return of insurers will require months. Russian refineries will not automatically recover alongside Hormuz. Consequently, gasoline, diesel, and jet fuel could remain expensive even as Brent prices decline.
The fourth and most destructive scenario is a chain reaction of export protectionism. Russia has already restricted diesel exports. Should the United States, European nations, China, or major Asian producers begin holding fuel within their domestic markets, the global market will fragment into national silos. Every ban will appear rational within an individual country while proving catastrophic for the broader system. This is precisely how a localized deficit translates into global panic: not through an absolute absence of crude oil, but through the breakdown of trust in open trade.
The Second Shock Will Be Paid For Not With Reserves, But With Growth and Political Stability
The initial energy shock of 2026 proved less severe than apocalyptic forecasts suggested, not because oil lost its relevance or because the global economy became invulnerable. The world simply utilized nearly every available mechanism to defer the reckoning: releasing strategic stockpiles, dampening demand in Asia, scaling up production in the Americas, switching gas-fired generation to coal, rerouting tankers, and temporarily easing sanction regimes.
These remedies are now less effective. Inventories have diminished. China is returning to the market. Summer demand is growing. Hormuz is dangerous once more. The Red Sea has ceased to be a reliable bypass. Russian oil refining is damaged, and facility recovery is measured in months and years. The deficit has shifted from crude oil to products that cannot be replaced by a single political decision.
Therefore, the next oil shock will differ from the first. It may not begin with a single dramatic spike to 150 dollars. It could unfold more gradually and prove far more dangerous: through costly diesel, aviation fuel shortages, rising freight rates, fertilizer price hikes, food inflation, and higher interest rates. Such crises are harder to recognize and contain because they do not present as a single catastrophic event - until they converge into a recession.
The world financed the first crisis using reserves accumulated in the past. The second will have to be financed through current revenues, future growth, and political stability. Therein lies the primary threat of two wars merging into a single energy front.