Energy supply shocks hit industrial products, keep fuel surcharges high

Base oil shock causes global unease

The conflict in the Middle East has disrupted the global supply of Group III base oil, the key input for industrial lubricants, various automotive fluids, and specialty oils used in refrigeration, metalworking, and other processes. Roughly 20% of global production capacity has been impacted, severely tightening supply chains worldwide.

What’s happening

• In March, an Iranian drone attack, followed by fires, caused a partial shutdown of the Ruwais refinery in Abu Dhabi, a major production center for Group III base oils.
• Lost capacity is irreplaceable in the near term. Alternative sources, like re-refining used motor and cooking oils, can’t scale up to fill the gap.
• Supply is further constrained by the continued closure of the Strait of Hormuz, which is severely limiting exports from a core production region.
• Most remaining global supply is already under contract, leaving the spot market extremely tight and volatile.

The global impact

• The disruption is triggering strong unease among producers, highlighting how essential these inputs are across industries.
• Cost pressures are expected to ripple into manufacturing, food service, and broader industrial supply chains.
• Europe is most exposed due to its dependence on Middle East supply. The United States, a major oil producer itself, is better positioned but still impacted by global price increases.

What to consider next

• Reevaluate exposure to key chokepoints like the Strait of Hormuz, if possible.
• Secure supply early. Set contracts and diversified sourcing are critical in a constrained market.
• Because elevated costs are likely to persist for the short to medium term, work with your logistics provider to find savings elsewhere in your supply chain.

Crude oil backwardation signals extreme near-term tightness

Crude oil markets are experiencing a steep and sustained backwardation. This is a condition where current spot prices significantly exceed prices for future delivery—or it could be said that the market is assigning a higher value to having physical oil in hand than storing it for future delivery. The situation signals a severe near-term supply shortage with cascading impacts on fuel costs, manufacturing inputs, and global logistics.

What’s happening

• The Strait of Hormuz closure has triggered the largest oil supply disruption since the 1970s. It has choked flows from around 20 million barrels per day to a near standstill, severely constraining global supply.
• West Texas Intermediate (WTI) futures are deeply inverted, with near-term prices more than $40 above December 2026 contracts.
• This reflects a classic market dynamic, where immediate supply is scarce and highly valued relative to future availability.
• It also signals that traders believe current price spikes are likely temporary, driven by disruption rather than longer-term structural changes to the market.

The bigger picture

• Backwardation has dominated the oil market ~58% of the time since 1985 and often persists longer than expected in undersupplied conditions. But futures suggest lower prices if supply disruptions ease.
• In addition to increasing the cost of diesel fuel, jet fuel, and bunker fuel for ships, elevated crude-oil spot prices are already feeding through to petroleum-based industrial inputs, such as asphalt, plastics, and certain chemicals.
• Petroleum-based products for construction are also expected to increase in price. Items such as shingles, PVC piping, paints, caulk, sealants, adhesives, insulation, spray foam, plywood, and vinyl flooring will be impacted.

The logistics takeaway

• These higher costs cascade throughout supply chains, increasing landed costs for essentially all manufactured goods.
• For the transportation of goods, fuel surcharges from trucking, ocean, and air carriers are likely to remain elevated.
• Shippers should build flexibility into routing and planning. Despite traders’ expectations of a turnaround, uncertainty in global energy markets may persist.

Industrial demand for energy absorbs excess battery-making capacity

A slowdown in U.S. demand for electric vehicles has created excess battery manufacturing capacity, but supply is going into stationary storage and industrial uses. The data center boom is the main demand driver.

Behind the headlines

• Battery energy-storage systems are used by utilities and grid operators. Grid-scale energy storage is the fastest-growing segment of battery demand and these systems are essential for integrating renewable energy into the grid, since they make up for time without sunlight or wind.
• U.S. installations hit a record 9.7 gigawatt hours in Q1 2026 (+32% year over year), with utility-scale projects driving most growth.
• Falling battery costs, partly due to EV-related oversupply, are improving the economics of storage projects.

Data centers: The new demand engine

Data centers and AI infrastructure are creating massive new electricity demand. They require battery energy storage to ensure uptime and manage load swings. As a result, energy storage is shifting from backup to critical infrastructure. Other industrial sectors are following suit, going beyond utilities and adopting on-site energy storage to control costs and improve reliability.

What you should know right now

• Battery energy storage units and data center power equipment are often oversized and require specialized heavy-haul transportation. This will keep pressure on limited heavy-haul capacity.
• Data center and energy builds create localized surges in freight demand, especially in key growth markets, leading to volatility in capacity and pricing.
• Project managers should engage with their logistics providers early, during the front-end engineering design (FEED) stage, so they can avoid critical bottlenecks and secure capacity.

Shippers may be impacted by Supreme Court decision on trucking accidents

The U.S. Supreme Court’s recent decision in Montgomery v. Caribe Transport clarifies a legal issue for the freight industry. The Court ruled that accident-liability lawsuits against brokers may proceed under state law. While not explicit, the Court also appeared to suggest that shippers, too, may be liable under state law if a truck hauling their freight gets in an accident.

This introduces new complexity for shippers, who may face increased litigation exposure tied to how they select and vet trucking companies. While federal safety oversight remains in place, the addition of state-level liability is expected to increase compliance demands, legal costs, and insurance premiums.

Shippers should stay in close contact with their logistics providers to evaluate how the changing landscape may affect their transportation choices.

Taiwan Section 232 tariffs set at 15%

The U.S. and Taiwan have finalized a trade deal that sets a 15% cap on section 232 tariffs on a series of goods including wood, aluminum and copper. The tariffs are retroactive to May 1.

For more details, see the Trade Policy & Customs section of this report. 

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