Middle East Oil Market Braces for 'New Equilibrium' Amid Ongoing Conflict

The Middle East oil market is facing a difficult future as the ongoing war between Iran and its adversaries continues to disrupt energy supplies. The conflict, which began in July, has led to increased tensions in the region, with shipping routes being constrained, energy infrastructure coming under attack, and importers starting to avoid supplies from the area.

More than five months after the US and Israel launched military strikes against Iran, the region's energy sector appears weaker and more vulnerable than at any point since the war began. The conflict has expanded in recent weeks from the Strait of Hormuz to the Red Sea, with Yemen's Iran-backed Houthi militia declaring an embargo on Saudi exports.

The result is a significant decline in Middle East exports, with combined exports from the Gulf and Saudi Arabia's west coast slipping to around 6.2 million barrels per day. This is less than half the wartime peak of 13.4 million bpd hit in late June and far below the more than 20 million bpd that typically left the region before the conflict.

The complex, opaque trading patterns created by this stop-and-start conflict may be here to stay, with signs emerging that the threat of disruption will continue to hang over the region like a sword of Damocles. This could lead to higher insurance premiums, elevated shipping costs, and persistent concerns over supply security, forcing Gulf producers to agree to more bespoke, direct supply deals with importing nations outside today's highly liquid and efficient market.