Gulf oil exports hit pre-war levels. Why aren’t prices falling?

DUBAI: Gulf oil is flowing again. So why is Brent crude still above $100 a barrel?

Middle East crude exports rose above pre-war levels on four days in the final week of September, reaching between 19.5 million and 22.5 million barrels per day, according to provisional data from ship-tracking firm Kpler.

The seven-day average stood at 18.5 million barrels per day on October 1 — slightly above the pre-war average of about 18 million, according to media reports.

But the recovery in exports has not translated into the sharp fall in oil prices consumers might expect.

The reason is increasingly simple: Getting oil out is only part of the problem. Getting it safely and cheaply to where it is needed has become much more difficult.

Here is why.

Normally, yes.

Higher supplies should ease shortages and put downward pressure on prices.

The global oil deficit has already narrowed substantially. Energy Aspects estimates the shortfall at around 1.6 million barrels per day, compared with roughly 4 million barrels per day at the height of the disruption in May.

Yet Brent remains above $100 a barrel and more than 40 per cent above pre-war levels.

One reason is that the market is still pricing in the possibility of further disruption as attacks continue around the Strait of Hormuz.

But there is another increasingly important factor: Logistics.

Very expensive.

Moving crude from the Middle East to Asia aboard a very large crude carrier recently cost more than $1.2 million a day, according to shipping broker Poten & Partners.

In January, the equivalent cost was roughly $30,000 a day, according to The New York Times.

Freight once represented about 3 per cent of the delivered cost of a barrel of oil. It now accounts for roughly 27 per cent.

That means considerably more oil can reach the market without producing the price relief normally associated with higher supply.

The Iran war has disrupted shipping patterns that were built over decades.

Some crude is moving through alternative pipelines and Red Sea ports. Other shipments are passing through Hormuz using complicated arrangements involving multiple tankers and ship-to-ship transfers.

That ties up vessels for longer and reduces the number of tankers available elsewhere.

At the same time, Asian buyers sourcing crude from farther away must pay to transport it over longer distances.

Add higher insurance and security costs, and the price of delivering each barrel rises further.

Yes — in much larger quantities.

Crude flows through Hormuz reached a seven-day average of 14.2 million barrels per day on September 26, according to Kpler — nearly 80 per cent of pre-war levels.

Saudi Arabia alone exported an average of about 3 million barrels per day through Hormuz in September, its highest level since the conflict began.

That has helped prevent an even greater shortage, The New York Times said.

But the recovery remains fragile. Tankers continue to face attack risks, while increasing traffic through Hormuz can itself add demand for vessels and the costly arrangements being used to move crude through the region.

This is another major problem.

Crude oil has to be processed into products such as petrol, diesel and jet fuel before consumers can use it.

Refining capacity has been damaged in the Middle East and Russia, leaving the world with fewer facilities able to turn crude into finished fuels.

Diesel has been particularly affected.

So having more crude available does not automatically mean there is enough refining capacity to produce the fuels the global economy needs.

Yes, but that cushion has become much thinner.

Saudi Aramco CEO Amin Nasser said the world entered the crisis with almost 10 billion barrels of global oil stocks, AFP reported.

Since then, more than 1 billion barrels have been drawn from stocks to help offset lost supplies. Estimates suggest less than 6 billion barrels of commercial inventories remain, with much of that not practically available.

Nasser warned that rebuilding inventories while meeting continuing demand could take as long as two years.

More oil getting to market is an important first step — and it has already helped shrink the global supply deficit.

But a sustained fall in prices is likely to require more than restoring crude exports.

Shipping through Hormuz would need to become safer and more predictable, freight and insurance costs would need to fall, damaged refining capacity would need to recover and depleted inventories would need to be rebuilt.

Until then, the world may face an unusual situation: plenty more Gulf oil moving — but at a much higher cost of getting it to consumers.