Logistical Bottlenecks Keep Oil Prices High Despite Increased Exports

Middle East crude exports have surged to their highest levels since the start of the Iran war, with more Persian Gulf producers resuming transit through the Strait of Hormuz despite ongoing threats. Crude flows through the strait reached 14.2 million barrels per day on a seven-day average on September 26, nearly 80% of pre-war levels, according to Kpler. However, oil prices remain elevated, indicating that logistical challenges are as disruptive as supply losses.

For decades, the global oil industry operated as a finely tuned system to move large volumes of crude efficiently. The conflicts in the Middle East and Eastern Europe have disrupted this model, leading to record-high tanker rates, soaring insurance costs, and a severe shortage of refining capacity. These bottlenecks in the energy supply chain may take months or years to resolve, keeping energy prices high even as the crude supply squeeze eases.

The blockade of the Strait of Hormuz by Iran reshaped global oil flows, with producers diverting supplies through alternative routes. Saudi Arabia, for instance, used its East-West pipeline to deliver crude to the Red Sea port of Yanbu. However, after the pipeline was attacked, Saudi Arabia redirected exports back to the Gulf via Hormuz, discovering that the strait could be transited more easily than anticipated. Saudi exports through Hormuz averaged three million barrels per day in September, the highest level during the conflict.

Despite the increase in Gulf exports, which has helped reduce the global oil deficit, Brent crude remains above $100 per barrel. High freight and insurance costs, along with a shortage of refining capacity, are major price drivers. The loss of refining capacity in the Middle East and Russia has compounded the problem, particularly for diesel. The Group of Seven's decision to release diesel from strategic stocks will likely provide only temporary relief, as it does nothing to restore lost refining capacity.