Middle East Oil Flows Far from Normal Despite Signs of Oversupply

Crude oil shipments through the Strait of Hormuz and throughout the Middle East have rebounded to levels close to pre-war, according to vessel-tracking services. However, indications of an oversupply persist. Middle Eastern benchmarks have been declining for weeks, hinting that an oil glut may be emerging due to rising Persian Gulf exports and global demand contraction caused by high prices.

Despite this, the expenses for refiners and customers have not dropped. Transporting crude oil from the Middle East has become costlier due to war, insurance premiums, and escalating tanker rates, increasing from around $5 per barrel prior to the conflict to potentially $30 per barrel or more. Middle Eastern producers are compelled to cut their officially offered selling prices to attract customers as the surge in Persian Gulf exports is weighing down the physical prices of local grades.

Furthermore, with high freight costs, Middle East crude oil can only appeal to Asia's price-conscious buyers by offering lower prices. While a glut in the global oil and fuel markets appears to be forming based on the pricing of Middle Eastern barrels and the weakening of market benchmarks, the market shock is far from over. Increased flows do not suggest that passage through the Strait of Hormuz has become less perilous.

In reality, assaults on vessels have grown more frequent over the past month, and producers are using up a significant amount of the global tanker fleet on inefficient shuttle movements between the Strait and the Gulf of Oman, as well as ship-to-ship transfers in the Gulf of Oman. Normal oil trade patterns from prior to the Iran war may not return until the market adjusts to the new normal and Gulf producers establish alternative supply routes.

The war and insurance premium risks will persist as long as crude flows cannot adapt to this new reality.