Logistical Challenges Keep Oil Prices High Despite Rising Exports

Middle East crude exports have rebounded to their highest levels since the start of the Iran war, yet oil prices remain elevated, indicating that logistical challenges are as disruptive as supply losses. Crude flows through the Strait of Hormuz reached 14.2 million barrels per day on a seven-day average on September 26, nearly 80% of pre-war levels, according to Kpler. Despite this recovery, Brent crude remains above $100 per barrel, suggesting deeper issues within the energy supply chain.

The global oil industry, once a finely tuned system, has been fractured by conflicts in the Middle East and Eastern Europe. Record-high tanker rates, soaring insurance costs, and a severe shortage of refining capacity have created bottlenecks. These problems may take months or years to resolve, leaving consumers with persistently high energy bills even as crude supply squeezes ease.

Iran’s blockade of the Strait of Hormuz reshaped global oil flows, with Gulf producers diverting supplies through alternative routes. Saudi Arabia, for instance, used its East-West pipeline to export crude through the Red Sea port of Yanbu. However, an attack on the pipeline in early September forced Saudi Arabia to redirect exports back through Hormuz, demonstrating that large volumes could still transit the strait despite continued attacks.

Despite the increase in Gulf exports, which has reduced the global oil deficit to around 1.6 million barrels per day, prices remain high due to logistical challenges. Freight and insurance costs, once a minor component of oil prices, have surged. Rates to transport crude from the Middle East to Asia aboard a VLCC recently exceeded $1.2 million per day, up from roughly $30,000 a day in January. These costs now represent about 27% of the delivered price of a barrel.

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 is likely to provide only temporary relief. Refiners are increasingly competing for medium-sour crude grades, creating a feedback loop that supports crude prices. This dynamic makes it much more challenging to bring oil prices down.