Oil prices climb despite Middle East export recovery

Global oil prices have continued to rise even as reports indicate a recovery in crude flows from the Persian Gulf and the Red Sea. This divergence between physical supply data and market pricing suggests that increased barrel volumes alone are insufficient to restore confidence in the stability of global energy supplies. Market participants appear to remain unconvinced that the region has returned to normal operating conditions, leading to sustained upward pressure on prices despite the apparent logistical improvements.

Data from Kpler indicates that total October oil exports from the Middle East are currently higher than levels recorded before the United States and Israel launched strikes on Iran at the end of February. Specifically, flows through the Strait of Hormuz have averaged 11.7 million barrels per day this month, according to Kpler estimates. This represents a significant increase from the 9.8 million barrels per day recorded in September and approaches the pre-conflict average of 14.5 million barrels per day seen in February. However, these figures are the result of substantial effort, expenditure, and risk, as the region continues to face significant security challenges that complicate standard shipping operations.

The recovery in export volumes is occurring against a backdrop of intensifying attacks on maritime traffic. Data from the UK Maritime Trade Operations and statements from Iran’s Islamic Revolutionary Guard Corps indicate that at least 25 ships were hit in the Strait of Hormuz during the first 20 days of October. Industry observers note that many incidents go unreported for various reasons, suggesting the actual number of affected vessels could be as high as 40 to 50. The majority of these targets are tankers. Kpler reported a sharp decline in tanker traffic through the strait as a direct result of these strikes, with crude crossings falling 27 per cent from a wartime high to at least 10.1 million barrels per day in early October. On October 6, the firm counted only seven commodity carriers traversing the strait, the lowest figure since late July.

Recent reports from Reuters highlight a further contraction in daily average oil flows out of the Persian Gulf, which have shrunk to 8.5 million barrels per day from more than 20 million barrels per day just two weeks prior. This sharp drop in export rates, coupled with the steady trickle of tanker attacks, undermines any sense of security regarding Middle East oil supply. Much of the oil currently leaving the region is being moved via ship-to-ship transfers, a process that has pushed freight rates to record highs. The severity of the carrier shortage has reportedly led to discussions about lifting sanctions on some tankers used to transport Russian oil to alleviate the bottleneck off the coast of Oman.

However, experts caution that such measures may not provide an immediate solution. Rahul Kapoor, global head of shipping analytics and research for S&P Global Energy, noted that sanctions relief does not equate to immediately usable mainstream tanker capacity. He stated that the number of vessels that could realistically migrate back into mainstream trading would likely be materially smaller than the overall sanctioned fleet, as many shadow fleet tankers remain occupied with carrying sanctioned oil. This limited availability of vessels continues to exert pressure on the market, even as physical prices in some segments have seen a slight dip due to the rebound in Hormuz outflows and a minor decrease in tanker rates.

In the futures market, prices remain elevated, driven by persistent headline risk and low oil stock levels. A senior commodity analyst at Marex told Bloomberg that it is difficult to see stocks rebuilding given current dynamics. While there is hope that lower heating demand this winter, potentially driven by El Niño conditions, could provide some relief, betting on weather patterns is considered an unreliable strategy. Consequently, prices are expected to remain high until at least the end of the year. The situation illustrates that while workarounds exist for severe supply disruptions, such as the closure of Hormuz, they come at a significant cost and are not a substitute for normal business operations. The global energy market is adapting to this new reality of security risks, with no other viable alternative available.