Recovering oil flows ease physical prices, while escalation fears lift futures

Middle East crude exports have recovered above pre-war levels, but oil markets are still bracing for another escalation. Regional exports have averaged 17.3 mn bbl / d so far in October, up from 16.4 mn bbl / d in September and 16.9 mn bbl / d in the two months before the war, according to Kpler data cited by Reuters. Brent futures have nevertheless climbed to five-month highs as traders question whether those flows can keep coming.

Why it matters: Gulf producers and shipowners have restored substantial flows through alternative routes, offshore transfers, and altered sales terms. That preserves export revenues and market access, but leaves the recovery dependent on available tankers and a willingness to absorb extraordinary transport costs.

Hormuz is back to most of its pre-war flow: Crude flows through the strait reached 11.7 mn bbl / d in October, up from 9.75 mn bbl / d in September and around 82% of pre-war levels, according to Kpler. That is a sharp recovery from April’s wartime low of less than 1 mn bbl / d , excluding Iranian oil. More vessels are traveling in convoys close to Oman’s coastline under US naval protection, while shipping data suggests around a third of crossings still use the Iran-controlled northern route, Reuters added. Saudi exports from Yanbu have averaged 3 mn bbl / d this month following disruption to the East-West pipeline. That remains below June’s wartime peak of 4.3 mn bbl / d .

More barrels are moving through the conflict zone: This month has already recorded 28 confirmed and reported attacks on commercial shipping in the strait and surrounding waterways — the highest monthly tally in the Washington Institute for Near East Policy’s tracking, Reuters reports. Eleven supertankers were damaged this month alone, taking the total since the war began to more than 30, even as freight earnings exceeding USD 1 mn a day and deeper crude reductions encouraged shipowners to load inside the Gulf.

And taking some heat out of physical prices: Dated Brent — a benchmark for physical crude — has fallen roughly USD 15 in less than two weeks to some USD 120 per barrel, while Brent futures have gained about USD 10 to nearly USD 112 per barrel, Bloomberg reports. That builds on the trend we reported last week, with Oman crude’s premium over Dubai falling to around USD 4 per barrel, its lowest since late July, as exports recovered. The premium for the nearest-month Dubai contract over the following month has narrowed to less than USD 1 per barrel from around USD 15 a month ago.

SOUND SMART- When the nearest-dated contracts cost more than later ones, the market is in backwardation, a sign buyers want barrels now. Dubai is still backwardated, but the premium has shrunk sharply over the past month, signaling less immediate supply tightness.

That’s the split between oil on paper and oil in hand: Physical prices are responding to improved availability, while futures remain sensitive to the risk of fresh disruption, including a possible US escalation after the midterm elections. The benchmarks cover different pricing periods, and Dated Brent still commands an unusually large premium over futures. Record options activity also cuts both ways: Traders have bought protection against another rally alongside positions that would benefit from Brent falling below USD 100.

Barrels cost more to sell

Benchmark earnings for VLCCs from the Middle East to China are nearing USD 1.4 mn a day, more than 12 times pre-war levels, according to Reuters. Freight has eased from recent peaks, but the still-elevated cost is squeezing refining margins and forcing producers to offer reductions, according to Bloomberg. Aramco and Adnoc have also started selling some cargoes delivered to China and India, taking on shipping arrangements that buyers would ordinarily handle.

New routes, new buyers

Expensive freight has kept more crude close to where it is produced and helped redirect US supplies toward Europe, according to Bloomberg, adding to expected availability and weighing on Dated Brent. If regional exports hold up and freight keeps easing, physical market weakness could put downward pressure on futures. Another escalation could interrupt that adjustment — which is why recovering flows have yet to ease the risk premium.

The Chokepoint tracks the waterways the region’s trade can’t avoid — Hormuz, Bab Al Mandab, Suez — what’s getting through, and at what price.