Middle East Oil Market Adapts to Conflict with High-Cost Shuttle System

A new shuttle system is helping keep oil flowing from the Middle East despite regional conflict. The system, known as ship-to-ship transfers (STS), has become a vital lifeline for Gulf producers in recent months. In the Strait of Hormuz, several miles off Oman's coast, rows of tankers lie at anchor, connected by ropes and hoses to transfer crude from one vessel to another.

The STS method cuts the distance any one ship must travel, reducing the risk of transiting the strait. Even with US naval protection in place, many shipowners still refuse to send vessels through the conflict zone. Exports through Hormuz have reached around 6.5 million barrels per day (bpd) so far in September, according to Kpler data.

The emergence of this floating logistics network has helped prevent a severe supply shock, but it comes at a steep price. Benchmark freight rates for a very large crude carrier (VLCC) transporting Gulf crude to China have surged to above $30 per barrel, the highest level on record. With current crude prices around $105, freight now represents over a quarter of the cost.

The expansion of STS transfers in the Gulf has also limited the availability of tankers, pushing up global freight rates dramatically. Producers have been forced to offer deeper discounts on their crude to keep exports competitive, absorbing part of the increased transportation costs themselves.