Middle East oil producers have launched a battle to recapture market share lost during the Iran war, setting current and former OPEC members on a collision course as traffic through the Strait of Hormuz gradually recovers. Such turf battles usually send crude prices plummeting, yet consumers are unlikely to see much relief at the pump in the near term.
The Iran war, now in its eighth month, delivered the biggest shock to the global oil market in decades. After Iran imposed a blockade on the Strait of Hormuz – through which roughly a fifth of global oil supplies once flowed – Persian Gulf producers, including Saudi Arabia, the United Arab Emirates, Kuwait and Iraq, were cut off from their most important export route.
While some quickly shifted volumes to alternative routes bypassing Hormuz, regional exports remained well below pre-war levels for months.
That is beginning to change.
Crude exports through Hormuz have averaged 12 million barrels per day over the past two weeks, around 80 per cent of pre-war levels, according to data analytics firm Kpler.
When combining Hormuz volumes with shipments through alternative routes, including Saudi Arabia's Red Sea terminals and the UAE's Fujairah export hub, Middle East crude exports exceeded the pre-war average of 18 million bpd for much of the week ending October 3, according to Kpler.
As a result, the global crude supply deficit is expected to narrow to just 250,000 bpd in October from almost four million bpd in May, according to consultancy Energy Aspects.
The Strait of Hormuz remains far from safe, however. Iranian forces continue to target vessels moving through the narrow waterway, with nearly one tanker hit every day over the past two weeks.
But gulf producers are increasingly willing to accept this risk, as well as the sky-high shipping and insurance costs, to maximise their exports and rebuild ties with customers forced to seek alternative suppliers during the disruption. This has nevertheless kept benchmark Brent oil prices elevated at over $100 a barrel, around 40 per cent above pre-war levels.
It appears the first shot in the Mideast market share war has already been fired.
Oil market share battles in the OPEC era have historically occurred following the discovery of new sources of supply, such as offshore drilling in the 1980s or the shale revolution in the 2010s. In response to perceived threats to its market dominance, the Organisation of the Petroleum Exporting Countries has typically reacted by allowing low-cost producers to ramp up output in an attempt to squeeze rivals.
This time, however, the battle is undermining the group from within.
OPEC, already reeling from the war early in the year, was dealt another heavy blow in May when the UAE withdrew from the group to pursue plans for a substantial increase in production capacity.
The move raised questions about whether the 66-year-old Saudi-led club could emerge from the conflict with its influence intact and reassert its ability to manage prices through coordinated supply control.
The seemingly uncoordinated, fragmented response of gulf producers to the Iran conflict suggests that control may no longer exist.
The recent rebound in exports is encouraging gulf states to raise production rapidly.
Combined crude production in Saudi Arabia, the UAE, Iraq and Kuwait is expected to average 17.3 million bpd in October, compared with about 21 million bpd in the six months before the war, according to Energy Aspects.
The recovery, however, is uneven.
The UAE, having rapidly developed the complex Hormuz shuttle system, has exported an average 3.3 million bpd of crude since June, broadly matching pre-war levels, according to Kpler.
At the same time, UAE production has averaged around 4.2 million bpd since June, above its pre-war average of 3.9 million bpd, according to Energy Aspects.
Saudi Arabia's path has been more complicated.
Riyadh initially redirected large volumes of crude to its west coast port of Yanbu following the outbreak of the war, enabling exports to remain near 60 per cent of pre-war levels during much of the conflict. But attacks on the East-West pipeline in September, combined with a Houthi blockade of the Bab el-Mandeb Strait used for exports, disrupted that strategy and forced the kingdom to shift more exports back through Hormuz.
The move has proven successful. Saudi crude exports have averaged about 7.3 million bpd over the past three weeks, close to pre-war levels, according to Kpler.
Production, however, remains significantly lower. Saudi output is expected to average just 7.4 million bpd in October, roughly 75 per cent of pre-war levels, reflecting reduced domestic refining capacity following strikes on processing facilities in recent months. Saudi Aramco's CEO Amin Nasser this week told the Energy Intelligence Forum conference in London that the kingdom could increase its production to 12 million bpd within days if needed.
Recovery levels vary widely among the other gulf producers, with a notable ramp-up in production in Iraq.
The impact of increased Middle Eastern production is beginning to show up in Asia, the destination for most gulf crude exports.
Saudi Arabia's share of Asian crude imports fell from 24 per cent in February to a record low of nine per cent in September but is expected to recover to around 14 per cent in October, according to ROI calculations based on Kpler data.
The UAE largely maintained its position, with its share of Asian imports slipping only slightly from 13 per cent in February to 12 per cent in October.
The biggest loser has been Iran.
Iranian crude sales have effectively collapsed since the United States imposed a naval blockade on the country's exports. Iran's share of Asian crude imports fell from a one-year high of six per cent in March to zero in October.
The scramble to recover lost customers is becoming a defining feature of the post-blockade market. gulf producers, eager to replenish state coffers after more than seven months of disruption, are increasing exports while some producers, including Iraq and Saudi Arabia, have offered deep discounts to buyers willing to load cargoes inside the gulf.
But will this result in dramatically lower prices at the pump? Probably not as long as getting oil through Hormuz remains this risky, unpredictable and expensive.
The Mideast oil export recovery rests on fragile foundations, but gulf producers appear willing to forge ahead with their own battle regardless.
(Ron Bousso; Editing by Jamie Freed)