Hormuz Risk Premium Keeps Crude Oil Prices Volatile

Crude Oil prices have been volatile in recent days, with a drop to $94.50 followed by a full recovery to around $97.50. The price movement is attributed to Saudi Arabia's decision to offer extra cargoes of oil to Asian refiners through Oman, which has led to an increase in the amount of oil being transported through the Strait of Hormuz.

Despite the increased risk associated with transporting oil through this region due to geopolitical tensions and potential attacks from Houthi drones, the volumes of oil being transferred have actually increased since August. According to data, transfers in the Gulf of Oman are running at around 2.7 million barrels a day, compared to 1.5 million in August.

The East-West pipeline, which is a genuine route that avoids the Strait of Hormuz, has been damaged and is expected to be out of commission for several weeks. This means that every Saudi barrel sold into Asia must still cross the strait, putting a premium on the price of oil. The market has already factored in this risk, with prices reaching as high as $102.00 earlier this month.

The repair of the pipeline is expected to take around three to five weeks, and until then, every Saudi barrel sold into Asia will have to be transported through the Strait of Hormuz. This has led some European cargoes due in October to be cancelled outright, highlighting the impact of these risks on global oil markets.