Oil Market Shifts Focus from Prices to Shipping Costs

The US-Iran conflict has shown that the oil market is resilient and adaptable. Despite disruptions to traditional shipping routes, barrels of oil are still being transported out of the Middle East. However, this comes at a significant cost.

Oil producers have been relying on ship-to-ship transfers around Oman to keep the physical market functioning. These transfers are expected to reach 2.5 million bpd in September, up from 1.4 million bpd in August. The increased reliance on these transfers is due to the conflict disrupting traditional export routes.

The cost of moving oil has become extraordinarily expensive. Freight expenses for very large crude carriers on some Gulf routes have climbed above $30 per barrel. This may not seem like a lot, but with crude prices around $100, transportation alone can account for more than a quarter of the barrel's cost.

This shift in focus from oil prices to the cost of moving energy is where the real oil shock lies. Markets are accustomed to thinking about an oil shock through one number - the oil price on screens. However, this only accounts for part of the story. The barrel itself, transportation, refining, and additional transportation before the finished product reaches businesses and consumers all contribute to the overall cost.

As each stage becomes more expensive, the inflationary impact can persist even if oil prices stop climbing. This is a signal that the physical oil market is becoming less efficient. The added costs of ship-to-ship transfers, additional voyages, higher insurance costs, and complicated logistics all contribute to the increased expense.