Middle East crude exports recently climbed to their highest levels since the start of the Iran war as more Persian Gulf producers resume transit through the Strait of Hormuz – despite the continued threat of Iranian attacks. Yet oil prices remain stubbornly elevated, suggesting logistical problems are proving as disruptive as outright supply losses.
Crude flows through the embattled waterway reached 14.2 million barrels per day on a seven-day average on Sept. 26, nearly 80 per cent of pre-war levels, according to analytics firm Kpler.
While volumes have declined since, they will likely be revised higher because ships often disable satellite tracking systems while traversing the strait and for several days thereafter.
Either way, the trend is clear: a lot more crude is getting through the strait. So why is Brent still trading above $100 per barrel?
In a word, logistics.
For decades, the global oil industry functioned as a finely tuned system designed to move enormous volumes of crude and fuels over long distances at the lowest possible cost.
The conflicts in the Middle East and Eastern Europe have fractured that model, as a combination of record-high tanker rates, soaring insurance costs and a severe shortage of refining capacity has created bottlenecks across the energy supply chain.
Those problems may take months, if not years, to unwind, leaving consumers facing persistently high energy bills – even if the crude supply squeeze continues to ease.
Iran's blockade of the Strait of Hormuz following the onset of the war with the US and Israel on February 28 rapidly reshaped global oil flows. gulf producers diverted supplies through alternative routes, buyers sought barrels from more distant regions and governments released unprecedented volumes of oil from strategic reserves.
One of the biggest changes was that Saudi Arabia – previously the world’s largest oil exporter – diverted its exports through its East-West pipeline, which delivers crude to the Red Sea port of Yanbu. At one point this year, four per cent of global oil supplies were via this route.
However, after the pipeline came under attack by Iranian-backed Iraqi militias in early September, Saudi Arabia was forced to redirect exports back to the gulf via Hormuz, which it discovered, could be more easily transited than previously thought.
Saudi exports through Hormuz averaged three million bpd in September, the highest level during the conflict, according to Kpler.
While Saudi Arabia’s crude exports through Hormuz in September were still only around half of pre-war volumes, the Kingdom’s exports could quickly near pre-war levels as the East-West pipeline gradually returns to normal operations.
Ironically, then, the attack on the East-West pipeline, which was intended to cripple Riyadh, may have instead weakened Tehran's most powerful leverage – its purported control of the strait – by demonstrating that large volumes can still transit Hormuz and other major export hubs despite continued attacks.
Yet the recovery remains fragile.
On the one hand, the increase in gulf exports has helped reduce the global oil deficit. Energy Aspects estimates the market now faces a shortfall of around 1.6 million bpd, down from roughly four million bpd during the peak disruption in May.
Under normal circumstances, such an improvement in supply would exert significant downward pressure on prices. Instead, Brent remains above $100 a barrel, more than 40 per cent above pre-war levels.
Prices certainly reflect a substantial risk premium linked to the possibility of renewed escalation, as Washington and Tehran have still failed to reach any form of understanding over the future of Hormuz.
But geopolitics is only part of the story.
Freight and insurance costs, once a relatively minor component of the delivered price of oil, have become major price drivers.
This is partly due to the current shuttle system operating around the gulf. Multiple tankers are frequently required to transport crude though Hormuz to the Gulf of Oman, where cargoes are transferred to smaller vessels before heading to buyers in Asia. This ties up significant numbers of very large crude carriers (VLCC), reducing vessel availability elsewhere.
At the same time, buyers are increasingly sourcing crude from the Atlantic Basin and shipping it to Asia over longer routes, further tightening tanker supply.
The result has been a surge in key tanker rates to record highs.
Rates to transport crude from the Middle East to Asia aboard a VLCC recently exceeded $1.2 million per day, up from roughly $30,000 a day in January, according to shipping broker Poten Partners.
As a result, freight costs that once accounted for around three per cent of the delivered price of a barrel now represent roughly 27 per cent.
These costs are unlikely to normalise until trade flows return to something resembling their pre-war pattern. Indeed, a further recovery in exports through Hormuz may initially worsen the situation by increasing demand for the elaborate shuttle networks now required to move crude safely through the region.
The loss of refining capacity in the Middle East and Russia, where Ukrainian drone attacks have crippled dozens of plants, has compounded the problem, particularly for diesel.
Diesel prices have surged to record highs, becoming a major political concern for US President Donald Trump ahead of next month's midterm elections, as diesel powers much of modern industry, agriculture and manufacturing.
The Group of Seven's decision last week to release diesel from strategic stocks will likely provide only temporary relief as it does nothing to restore lost refining capacity.
What’s more, refiners are increasingly competing for the medium-sour crude grades that generate higher diesel yields. Those barrels are concentrated in the Middle East and Russia, precisely the regions where supply disruptions remain most severe.
That dynamic is creating a feedback loop. Tight refining capacity boosts diesel prices, which increases demand for diesel-rich crude grades, which in turn supports crude prices.
The result is that oil prices are no longer primarily a function of supply, but of the industry's ability to transport and process crude – making it much more challenging to bring these prices down.
(Ron Bousso)