Not Just the Strait of Hormuz! Global Energy Supply Faces Triple Crisis as Stagflation Risks Rise, Experts Warn

With Middle East conflicts continuing to escalate, the Russia-Ukraine war intensifying, and global energy supply chain buffers gradually eroding, asset management giant PIMCO is sounding the alarm. The global energy market is entering an extremely fragile phase, and oil price movements over the next few months will depend on whether energy infrastructure suffers large-scale attacks and whether vital sea lanes such as the Persian Gulf and Red Sea can return to normal operation. Should supply disruptions persist, the global economy could face rising stagflation risks, putting pressure on equity markets, credit markets, and the global economy.

PIMCO economists Tiffany Wilding and commodities and real assets portfolio manager Greg Sharenow co-authored an article stating that the biggest risk to today’s energy markets is no longer just the Strait of Hormuz, but the simultaneous impact of three geopolitical hotspots—the Persian Gulf, the Red Sea, and the Russia-Ukraine war zone—on global energy supplies. Markets are facing a compound shock rarely seen in recent years.

PIMCO highlights two key variables shaping energy markets this year. First is whether energy facilities continue to be attacked, including critical infrastructure in the Persian Gulf, Russia, and Ukraine. If refineries, ports, or oil transport facilities are damaged, supply gaps could last for months or even longer, further exacerbating global supply-demand imbalances.

The second key factor is how long shipping disruptions will last. PIMCO believes progress in U.S.-Iran negotiations and whether both sides can reach agreements to reduce tensions will determine whether energy transportation can normalize. If major global shipping lanes cannot resume smooth operations, not only could oil prices continue to rise, but the risk of a global economic recession would also increase.

Three Major Energy Hubs Under Simultaneous Pressure

PIMCO analyzes that global energy supply risks are now concentrated in three regions. First, the Persian Gulf remains the most critical source of energy risk. While the Strait of Hormuz briefly resumed limited navigation after a ceasefire, shipping activity has again approached near standstill. Since about 20% of the world’s oil supply passes through this strait, prolonged transportation disruptions would severely restrict crude oil exports.

PIMCO notes that the U.S. continues to limit Iran’s oil exports, while Iran attempts to gain strategic leverage by controlling the Strait of Hormuz. Cumulative oil supply losses have already exceeded 1 billion barrels, making it one of the largest net energy supply losses in history. With ships frequently attacked, insurance costs have surged, leading more shipowners to avoid risking passage through the strait.

Second, Red Sea shipping risks are rising again. As Saudi Arabia has recently rerouted some crude exports via the Red Sea, continued attacks by Houthi militants on Red Sea shipping lanes, ports, or pipelines could impose greater restrictions on Middle Eastern oil exports.

PIMCO believes that if attacks remain localized, the impact would mainly reflect in higher logistics costs. But if they escalate into a full blockade, direct reductions in global supply would follow.

Third, the Russia-Ukraine conflict continues to expand its impact on energy markets. PIMCO points out that Ukraine’s sustained attacks on Russian refineries, ports, and Black Sea and Azov Sea shipping facilities have driven Russian refining output to its lowest level in over two decades, forcing Russia to begin importing gasoline to meet domestic demand.

Additionally, attacks on the port of Novorossiysk have affected Kazakhstan’s crude exports. Since this port accounts for approximately 2% of global oil supply, its disruption cannot be ignored—even amid relatively ample global supply.

Refined Products and Natural Gas Face Greater Pressure Than Crude

PIMCO emphasizes that what truly worries markets isn’t just crude oil, but also refined products such as diesel, jet fuel, and gasoline. Recently, the price premium of refined products over crude oil has reached historic highs, reflecting global bottlenecks in refining and logistics.

Although international crude oil prices have fallen nearly 30% from their yearly peak, gasoline and diesel prices remain close to their highs. U.S. retail gasoline prices stay above $4 per gallon, while diesel exceeds $5.

PIMCO notes that about two-thirds of global oil demand comes from transportation. If diesel and jet fuel supplies remain tight, not only will logistics costs rise, but food prices and overall supply chain pressures could also increase.

Moreover, the Persian Gulf is a major global export hub for liquefied natural gas (LNG). Global natural gas prices have already risen to their highest levels since the outbreak of the Russia-Ukraine war. Excluding the U.S., most regions are approaching winter inventory levels not seen in over a decade, heightening winter energy supply risks.

Global Energy Buffer Space Rapidly Disappearing

PIMCO stresses that the biggest difference in today’s global energy market compared to the beginning of the year is the drastic reduction in resources available to buffer supply shocks. Strategic petroleum reserves worldwide have released about 300 million barrels, bringing U.S. strategic reserve levels to their lowest since 1983. Commercial inventories have also declined simultaneously, and key refined product stocks have dropped to multi-decade lows, leaving markets with almost no cushion against new supply shocks.

On the other hand, China’s recent sharp reduction in crude oil imports has become another key variable affecting the market. By drawing down inventories, cutting imports, and reducing refined product exports, China has suppressed global crude demand in the short term—but reduced exports have worsened international refined product supply tensions.

PIMCO warns that if China resumes restocking in the future, global crude demand will surge rapidly. If supply does not expand accordingly, oil prices will face even greater upward pressure.

Rising Stagflation Risks – Asia May Be Hit Hardest

PIMCO warns that today’s energy market is facing a classic supply shock, which simultaneously pushes up inflation and drags down economic growth, creating a stagflationary environment.

Rising energy prices equate to higher costs for businesses and households. When supply remains insufficient, demand will inevitably be suppressed. Europe, the UK, Japan, and most Asian energy-importing nations will be among the hardest hit.

The rapid expansion of AI data centers, along with growing energy demands from high-consumption industries like semiconductors and memory chips, makes this energy shock different from past episodes and could amplify market volatility.

PIMCO notes that financial markets have not yet fully priced in the risk of prolonged energy supply disruptions. If markets begin to believe supply issues will persist long-term, financial conditions could tighten rapidly, placing greater stress on equity and credit markets.

"Early in our careers, daily fluctuations of several hundred thousand barrels were enough to move prices and shape market views. Today, there are so many projects involving millions of barrels of uncertainty—it’s hard to believe," PIMCO said. If supply fails to normalize, price impacts will be substantial. Amid mutual distrust and geopolitical deadlock unlikely to resolve soon, oil price risks remain skewed to the upside, and the global economy will continue to face the dual challenge of inflation and slowing growth.