Middle East Oil Flows Far From Normal Despite Signs Of Oversupply

Authored by Tsvetana Paraskova via OilPrice,Middle Eastern crude exports have recovered to near pre-war levels, raising fears of an oil glut and pushing Brent down roughly 17% in five trading days.Record tanker rates and war insurance premiums remain a major burden, with crude transport costs reaching $30 per barrel despite weakening oil prices.Depleted global inventories and disrupted fuel exports threaten a sustained recovery, with industry leaders warning that rebuilding oil stocks could take up to two years.Crude oil flows through the Strait of Hormuz and the whole Middle Eastern region have recovered to close to pre-war levels, vessel-tracking services have been signaling for over a month now.Middle Eastern benchmarks have been weakening for weeks, suggesting an oil glut may be building amid rebounding Persian Gulf exports and global demand destruction amid high prices.On the face of it, an oversupply of crude oil could be forming. But the costs to refiners and consumers are not falling. War, insurance premiums, and record tanker rates have raised the cost of transporting a barrel of crude oil from about $5 per barrel before the war to as much as $30 a barrel, and at times even higher.Middle Eastern producers are forced to slash their official selling prices to win customers because the surge in Persian Gulf exports is weakening the physical prices of local grades. Moreover, amid high freight costs, Middle East's crude oil could only win Asia's price-sensitive buyers with lower prices.Shock Not OverThe pricing of the Middle Eastern barrels and the weakening market structure of the benchmark Middle East crudes signal an oil glut is forming.But the shock to the global oil and fuel markets isn't over as increased flows don't mean traffic through the Strait of Hormuz has suddenly become less dangerous. In fact, attacks on vessels have intensified in the past month, while producers are tying up a large portion of the global tanker fleet on inefficient shuttle movements in and out of the Strait and subsequent ship-to-ship (STS) transfers in the Gulf of Oman.Normal oil trade patterns from before the Iran war may never return. Until the market adapts to the new normal and Gulf producers build alternative supply routes, the war and insurance premium risks will remain with crude flows.Hopes are high again in the past few days that the U.S. and Iran could reach an agreement, amid signals that President Donald Trump could pursue diplomacy instead of escalation following the crushing defeat in the U.S. midterm elections. In the past five trading days after the elections, Brent Crude prices slumped by about 17% to trade just above $91 per barrel early on Tuesday.The market has been blindsided by sudden breakdowns of attempts at talks on several occasions in the past eight months. The relative calmness after the elections in the U.S. and Israel, which weren't positive for either Trump or Benjamin Netanyahu, may be only transitory.Weaker Middle East Oil PricesRegardless, the perceived near-term glut is pressuring the Middle East's crude oil prices.The curve of the Dubai benchmark signaled last week that rising oil flows from the Middle East are exceeding demand for the first time since early July, when the three-week U.S.-Iran ceasefire allowed millions of barrels to leave unhindered the Strait of Hormuz. The November contract of the Dubai grade was in contango early last week, suggesting that concerns about the immediate lack of crude supply have eased significantly.Rising supply from the Middle East has also weakened both the Dubai and Murban prices. At the end of October, the prices of physical Middle East crude slumped as flows from the region are recovering and reaching pre-war levels on some days.Saudi oil giant Aramco last week slashed the price for its flagship Arab Light crude for Asia for loading in December by $2 per barrel, to a discount of $6.50 per barrel to the Oman/Dubai average. This is the steepest discount to the Middle East's benchmark since May 2020 during the COVID pandemic.Yet the cost to move the crude out of the region is very high - freight rates remain elevated amid a shortage of tankers and still sizeable war insurance premiums.Normalization is further off in fuel exports out of the Middle East."Middle East crude exports have returned to pre-war levels, while refined product flows remain at just 37% of normal," Ole Hansen, Head of Commodity Strategy at Saxo Bank, said in a note last week."For now, the market is trading on hopes of a breakthrough rather than concrete evidence that an agreement is close. The two sides may still be far apart on important issues, leaving the outlook highly uncertain," Hansen added."Without sustained positive signals from both Washington and Tehran, the recent decline could prove vulnerable to a reversal."Depleted Inventories Could Boost Post-War DemandEven if the Iran and Ukraine wars were to be settled with lasting peace agreements by the end of the year, the glut narrative may not hold because global inventories have depleted so much that it would take months, and probably a few years, to bring them back to adequate levels."Re-filling inventories while meeting demand could take up to two years," Saudi Aramco's CEO Amin Nasser said at an energy conference in Riyadh last month.The chief executive of another major Middle Eastern national oil company, ADNOC, last week warned that diesel stocks in some markets have slumped to their lowest seasonal levels in 35 years.The global energy system needs to be more resilient as the Middle East crisis has forced nearly 1 billion barrels of crude draws from inventories, ADNOC's chief executive Sultan Al Jaber said at the ADIPEC 2026 energy conference in Abu Dhabi."Simply put, the world has eroded its supply buffers," Al Jaber said.