Despite Increased Oil Flows, Iran War Turmoil Fuels Persistent Price Hikes

Despite a significant increase in oil exports from the Gulf, which have surpassed pre-war levels according to market intelligence firm Kpler, crude oil prices continue their upward trajectory. Brent crude, the global benchmark, is experiencing its highest prices since April, marking a more than 60 percent increase compared to the period before the conflict. On Friday, December Brent crude futures briefly exceeded $117 a barrel, rising over 2 percent.

Market analysts attribute the climbing prices to ongoing anxieties surrounding the potential for renewed hostilities in the United States' war on Iran, diminishing oil stocks, and the escalating costs associated with transporting supplies from the region. Adi Imsirovic, a lecturer in energy systems at the University of Oxford and a veteran oil trader, explained that the market is signaling ample prompt oil availability but also reflecting the high likelihood of conflict escalation, with no end to the war in sight. "Therefore, futures markets reflect that expectation," Imsirovic stated.

Oil producers have demonstrated increased adaptability in navigating the volatile Middle Eastern climate to maintain supply flows. To mitigate the risks posed by potential Iranian attacks on shipping in the Strait of Hormuz, maritime companies have implemented a shuttle system. This involves ship-to-ship transfers off the coasts of Oman and the United Arab Emirates, reducing the distance individual vessels must traverse through hazardous waters. In August, Kpler data indicated that over 70 percent of crude passing through the strait utilized these ship-to-ship transfers.

Furthermore, oil producers are increasingly rerouting exports to bypass the Strait of Hormuz entirely. This is achieved through pipelines such as Saudi Arabia’s East-West pipeline, which transports oil from its eastern fields to the Red Sea port of Yanbu, and the United Arab Emirates’ Habshan-Fujairah pipeline. By September, Kpler data showed that 40 percent of Gulf exports were circumventing the strait, a critical route for one-fifth of global oil and liquefied natural gas supplies during peacetime, compared to 17 percent prior to the conflict.

However, these logistical workarounds have come at a significant cost. Data from the London Stock Exchange Group reveals that freight costs have surged to as much as $40 per barrel in recent weeks, approximately ten times the usual rate. This increase is attributed to elevated insurance premiums and logistical complexities. October has been the deadliest month for attacks on commercial vessels since the war began, with the United Kingdom Maritime Trade Operations (UKMTO) logging 32 incidents as of Friday.

"So barrels are moving, but neither smoothly nor reliably. That should not be read as a sign of normalisation," commented Isabel Figuerola-Ferretti, an expert in oil markets at Comillas Pontifical University in Madrid. "Delivering a barrel has become far more expensive." While recent market intelligence suggests export levels have reached pre-war figures at times, the longer-term supply outlook remains uncertain. Pavel Molchanov, an investment strategist at Raymond James & Associates, expressed skepticism, citing the International Energy Agency's (IEA) September production data, which showed OPEC Gulf production at 15.8 million barrels per day, or 75 percent of the pre-war baseline. "That slightly surpassed July’s 74 percent to reach the highest level since the start of the war, but it’s still a considerable distance from 100 percent," Molchanov noted.

Meanwhile, global oil stockpiles, which serve as a crucial buffer during supply disruptions, are dwindling. The IEA reported a decrease of 10 million barrels in observed inventories during September, bringing the global stockpile to 509 million barrels below its pre-war level. "The market has moved to a chronic squeeze, driven by concrete supply risks: Hormuz transit, shipping and depleted inventories," Figuerola-Ferretti stated.

With no clear resolution to the Iran war on the horizon, analysts anticipate that prices will remain elevated for the foreseeable future. Brent futures for October 2027 delivery, trading above $90 a barrel on Friday, indicate that a return to pre-war normalcy is not expected soon. "When could prices return to $70? Not soon," Figuerola-Ferretti predicted. "It would need durable de-escalation, a return to normal transit and shipping conditions through Hormuz, rebuilt inventories and freight costs back to normal." Molchanov believes that without a lasting diplomatic solution, supply is unlikely to exceed 85 percent of pre-war levels. He added, "Once the political groundwork is in place, the next steps will be logistical: Demining Hormuz, bringing shipping crews back to work, and resuming production at currently shut-in oilfields."