Middle East Oil Flows Far from Normal Despite Signs of Oversupply

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Crude oil flows through the Strait of Hormuz and the whole Middle Eastern region have recovered to close to pre-war levels, vessel-tracking services have been signaling for over a…

What I Cover Tsvetana Paraskova is an energy and commodities journalist who has contributed to Oilprice.com for nearly a decade, covering global energy markets, commodities,…

Crude oil flows through the Strait of Hormuz and the whole Middle Eastern region have recovered to close to pre-war levels, vessel-tracking services have been signaling for over a month now.

Middle Eastern benchmarks have been weakening for weeks, suggesting an oil glut may be building amid rebounding Persian Gulf exports and global demand destruction amid high prices.

On the face of it, an oversupply of crude oil could be forming. But the costs to refiners and consumers are not falling. War, insurance premiums, and record tanker rates have raised the cost of transporting a barrel of crude oil from about $5 per barrel before the war to as much as $30 a barrel, and at times even higher.

Middle Eastern producers are forced to slash their official selling prices to win customers because the surge in Persian Gulf exports is weakening the physical prices of local grades. Moreover, amid high freight costs, Middle East’s crude oil could only win Asia’s price-sensitive buyers with lower prices.

The pricing of the Middle Eastern barrels and the weakening market structure of the benchmark Middle East crudes signal an oil glut is forming.

But the shock to the global oil and fuel markets isn’t over as increased flows don’t mean traffic through the Strait of Hormuz has suddenly become less dangerous. In fact, attacks on vessels have intensified in the past month, while producers are tying up a large portion of the global tanker fleet on inefficient shuttle movements in and out of the Strait and subsequent ship-to-ship (STS) transfers in the Gulf of Oman.

Normal oil trade patterns from before the Iran war may never return. Until the market adapts to the new normal and Gulf producers build alternative supply routes, the war and insurance premium risks will remain with crude flows.

Hopes are high again in the past…

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