Hormuz shuttles keep oil flowing, but at a high cost

A new ship-to-ship (STS) transfer system is reshaping the Middle East oil market amid heightened regional conflict. Tankers lie anchored miles off Oman's coast, connected by ropes and hoses to shift crude from one vessel to another, forming a floating bridge between the region's oilfields and the global market. This complex, expensive process has become a stopgap measure, potentially becoming the new normal in the energy market.

Ship-to-ship transfers have become vital for Gulf producers as they adapt to disruptions caused by the Iran war, now in its seventh month. Tankers disconnect post-loading and head to their destinations, typically Asian refineries, with mother vessels returning to the Gulf via Hormuz to reload and repeat the process. The system reduces the distance any single ship must travel, cutting risks during the Strait of Hormuz transit.

Exports through Hormuz reached a peak of around 6.5 million barrels per day (bpd) in September, the highest since a brief spike post-June ceasefire. This adaptation effort showcases the energy industry's resilience in the face of supply shocks. However, it also highlights the significant costs involved in moving oil from the Middle East, the world's most crucial export region.

Before the conflict, the Strait of Hormuz handled roughly a fifth of global oil consumption. Iran's blockade halted traffic, prompting producers to divert flows and cut output. Faced with limited tankers, Abu Dhabi National Oil Company (ADNOC) developed the STS workaround. Shipowners initially balked at sending vessels through this conflict zone, demanding unprecedented premiums. Yet, the energy industry rarely stands still, adapting to the shortage of available tankers.

In April, ADNOC began using shuttle tankers to transport crude from Gulf terminals to the safer Gulf of Oman, then transferring cargoes to larger ships for onward journeys. This strategy maximized the use of a limited and expensive tanker fleet, allowing vital exports to continue. UAE oil exports in September are expected to reach 3.6 million bpd, higher than the 2025 average of 3.4 million bpd.

Saudi Aramco is increasingly relying on STS operations due to disruptions in Red Sea export routes. Yemen's Iran-backed Houthi forces have tightened their grip on the Bab el-Mandeb Strait, while Iran-backed militants in Iraq struck Saudi Arabia's East-West pipeline, cutting off roughly 4% of global oil supplies via the Red Sea port of Yanbu. These events pushed Brent crude to over $108 a barrel, with freight rates surging to above $30 per barrel for very large crude carriers (VLCC) transporting Gulf crude to China.