Middle Eastern Oil Producers Adapt to New Reality

The Strait of Hormuz has become a critical chokepoint for Middle Eastern oil exports since Iran shut it down, but producers have found ways to adapt. Ship-to-ship transfers and pipelines bypassing the strait, where available, are now used by most regional oil exporters.

Oil producers in the region have demonstrated remarkable flexibility to survive under these new circumstances. However, this workaround comes at a significant cost, adding to the end price of cargo. As a result, oil exporters from the Gulf often discount their crude, particularly notable in the case of Iraq, which lacks alternative routes due to its geography.

According to recent data, oil flows through the Strait of Hormuz have averaged 6.5 million barrels daily since the start of the month, significantly lower than the pre-war rate of around 20 million barrels. Despite this reduction in exports, traders seem to be adjusting to the new reality and are not as concerned about fluctuations.

The news that Saudi Arabia had restarted its East-West pipeline caused a sharp drop in oil prices this week. This highlights how crucial energy infrastructure in the Middle East is for trader sentiment, especially if it bypasses the Strait of Hormuz. The restart of the pipeline allowed Aramco to send crude to the Red Sea port of Yanbu instead of using ship-to-ship transfers, which have higher freight costs.

The UAE has also begun using smaller vessels for ship-to-ship transfers in the Gulf of Oman, motivated by the shortage of supertankers due to shipping risk. This move appears to be paying off, with estimated oil exports from the UAE set to surpass last year's levels despite the disruption caused by the war.