Gulf Crude Discounts Outrun the Forecast

Saudi Aramco will sell December Arab Light to Asian refiners at a discount of $6.50 a barrel to the Oman/Dubai average, the lowest since May 2020. That is a cut of $2 from November, according to a pricing document reported by Reuters and carried by BOE Report. Traders surveyed the week before had expected an unchanged price or a cut of up to $2. Aramco went to the top of the range.

A seller does not do that in a tight market. Aramco also trimmed December prices by $1 a barrel across all grades for Northwest Europe and the Mediterranean, and left U.S. prices alone. The cuts matter because they land while Brent futures still carry a war premium and the main official forecast still assumes the Strait of Hormuz stays constrained.

The barrels are coming back

Reuters columnist Ron Bousso, in a column carried by Bairdmaritime, wrote that Middle East producers are slashing prices to attract buyers as the recovery in Hormuz flows tips the crude market toward oversupply. Kpler data cited in the column put October crude exports through the strait, excluding Iran, at 10.3 million barrels a day. In the first month of the war the figure was virtually zero. The pre-war average was 13.5 million. Counting Yanbu on the Red Sea and Fujairah, total regional crude exports reached 16.6 million in October, just shy of the pre-war 17 million.

Saudi Arabia is a large part of that. HSBC raised its fourth-quarter Saudi production forecast to 8.3 million barrels a day from 6.3 million, citing a faster-than-expected export recovery. It expects output to return to about 10 million by mid-2027. A Reuters survey found OPEC output rose by 1.38 million barrels a day in October to 22.87 million, led by Saudi Arabia, Kuwait and Iraq. Oil & Gas 360, citing Iraqi energy officials, reported that Iraq's exports recovered to about 3.5 million barrels a day in October from 2.65 million in September.

Other suppliers did not wait for the Gulf. Bousso noted that the U.S., Brazil, Canada and others have already boosted output. Energy Aspects put global crude production at 85 million barrels a day in October, above its five-year average of 83 million. JPMorgan estimates Latin America alone is supplying about 1.5 million barrels a day more than a year ago, and that demand has fallen by about 3.3 million since the conflict began.

The physical market has noticed. Oman's premium to the Dubai benchmark fell from $34 a barrel in mid-September to its weakest since July last Tuesday, then recovered slightly to $1.76 on Thursday, Reuters data showed. Morgan Stanley said Dated Brent, which prices cargoes around the world, has weakened to a discount to the nearby futures contract. Storing the surplus does not pay either: prompt Brent trades at a sharp premium to later contracts, Bousso wrote, which leaves producers fewer options.

Two forecasters, opposite readings

JPMorgan estimates the market returned to a surplus of 1.1 million barrels a day in September, widening to 1.4 million in October. Oil & Gas Journal notes that this contrasts with the IEA's 14 Oct report, which put September in a deficit of about 790,000 barrels a day. That leaves nearly 1.9 million barrels a day between the two views of the same month. The IEA projected a fourth-quarter deficit of about 1.8 million, on supply of 101.7 million and demand of 103.5 million. It also said global observed inventories at the end of September stood 509 million barrels below end-February levels.

Part of the gap is definitional. Oil & Gas Journal points out that the IEA's Gulf crude export figure, 13.9 million barrels a day in September, covers a narrower category than JPMorgan's Middle East oil exports. The IEA cautioned that refined product and LPG shipments from the region were still below half their prewar levels. It warned diesel could stay tight. Even so, it expects a return to surplus in 2027.

The EIA's forecast belongs to the earlier, tighter picture. Its October outlook, completed October 1, 2026, put fourth-quarter Brent at $105 a barrel, $14 higher than the previous month's. It assumed Middle East flows stay constrained through the quarter and does not account for events after October 1. For 2027 it sees Brent averaging $84.

A market that wants peace, a war that has not stopped

Brent futures were down $4.57, or 4.65 percent, at $93.75 a barrel by midday in New York on Monday, Reuters reported, with WTI at $87.64. That follows a fall of more than 8% on Nov. 4, when the midterms handed Democrats both chambers of Congress. "This seems to have encouraged sellers on the prospects for peace even while the actual fighting is not slowing down.," TACenergy analysts wrote. Energy equities did not join the selloff: XLE rose 0.52% on the session.

The war premium is not irrational, and the risks have not gone away. Reuters noted that Middle East premiums returned to pre-war levels even as attacks on tankers crossing Hormuz rose. Saudi Arabia's East-West pipeline was struck in the Medina region, though a fire was put out and operations were unaffected, according to an Energy Ministry source cited by state media. A senior Iranian security official said Tehran will not negotiate unless Washington meets seven conditions from a June interim agreement.

Bousso's column argues that a durable settlement would cut freight and security costs and let Gulf producers move more crude into a market that is already well supplied. Iraq's foreign minister, Fuad Hussein, told Al Jazeera that Baghdad has an understanding with Washington to move crude through a shipping corridor near Oman, as relayed by Oil & Gas 360.

The EIA's next outlook is due November 10, 2026. It will have to explain why the sellers are already discounting.