The World Enters the Eighth Month of Middle East Conflict, Amid Compounded Supply Chain Challenges

Résumé détaillé

The world enters the eighth month of the war in the Middle East, with no clear end in sight and with a current price rally for Brent contracts (surpassing $117/bl at the end of…

The world enters the eighth month of the war in the Middle East, with no clear end in sight and with a current price rally for Brent contracts (surpassing $117/bl at the end of October), signaling that market participants expect a potential escalation rather than an unwinding, at least in the context of the US midterm elections.

It is worth reviewing the status of the global market from a wide perspective, to see how complicated it will be to “return back to normal” when a potential ceasefire could be announced. Let’s walk through the oil supply chain, following the path of a crude barrel and review how disrupted each sector is, at least as of now.

At the upstream level, global crude balances are unstable to say the least. Normal crude production in the Middle East has been primarily a function of two limiting factors: on one side, attacks on actual production sites (i.e. the recent attacks on the Abqaiq massive processing facility that stabilizes millions of crude oil barrels to be sent via the Petroline to the Red Sea route).

On the other side, the main limiting factor for all Persian Gulf producers to return to normal production level has been the possibility to export barrels via Hormuz, which, despite optionality of shipping operations, continues to stifle crude exports, thus reducing production levels. As a result of this overall unbalance and the inherent geopolitical risks in these operations, Brent futures prices soared to over $117/bl towards the end of October.

The second stage on the oil supply chain is shipping itself: while Middle East crude flows are seemingly recovering (according to some marine shipping tracking services) they now command substantially higher costs, as complicated ship to ship operations to circumvent Hormuz shipping restrictions translate into operational risks, commercial uncertainty and erratic supply schedules: all of them increase delivered prices at destination.

On top of that of course, heightened geopolitical risks in the Black…

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