Gulf Oil Is Back. Cheap Oil Is Not.

At least 16.5 mbd of crude left the Middle East Gulf between 1 and 28 September, Kpler reported, matching the prewar average once Iran is excluded. By the usual logic of oil markets, that should have been the end of the panic. It was not. December Brent futures slipped about 0.3% to $108.42 a barrel on Wednesday, Oil & Gas 360 reported, with December WTI near $97.69.

The thesis here is simple. The binding constraint on oil prices has moved from the wellhead to the hull. The Gulf is shipping its crude again, but through a more cumbersome system, and that system charges a toll that the benchmark price does not show. Kpler's verdict was blunt: "The volume recovered. The route did not."

A route built around the strait

The Wall Street Journal, citing Kpler data relayed by International Business Times on Yahoo Finance, reported that flows through Hormuz and alternative routes averaged more than 24 million barrels daily in the week ended October 18, above the prewar 23.3 million. Yet the same report found no relief on prices, with Brent still above $100 a barrel.

The reason lies in how the oil now travels. Kpler says 40% of the Gulf's crude now leaves without crossing Hormuz, against 17% before the war, thanks to Saudi and United Arab Emirates pipelines. What does cross the strait often changes ships. In August, more than 70% of it switched tankers off Fujairah or Sohar. At least 63 VLCCs now work the Gulf shuttle trade, Kpler said, and dozens spend months shuttling between Gulf terminals and transfer points outside Hormuz rather than delivering to the final buyer. Ship-to-ship activity in the Gulf of Oman hit a record in September.

Goldman Sachs analysts said that tankers in the Persian Gulf and the Gulf of Oman are tied up in ship-to-ship transfers each day, according to a Bloomberg report carried by Yahoo Finance. A fleet that spends its days handing cargo to its neighbours is not a fleet carrying oil to refiners.

The toll

The price of that inefficiency is visible. Goldman's analysts wrote that the average rate for hauling crude has surged above $20 a barrel, up from $3 a year ago. They attributed $7 to the war-risk premium in Hormuz, and $4 each to higher fuel costs and the effect of ship-to-ship transfers. The Wall Street Journal, in figures relayed by International Business Times on Yahoo Finance, put freight for a supertanker carrying Gulf crude to China at about $37.37 per barrel this week. Oil & Gas 360, summarising a Goldman note dated October 20, reported that costs on certain Middle Eastern routes have exceeded $35 per barrel.

Insurance is part of the bill. Windward analyst Michelle Wiese Bockmann told the Journal that war-risk cover has risen to as much as 10% of a vessel's value, compared with less than 3% before. The Journal counted about 30 attacks on ships in October.

Scarcity matters as much as risk. Kpler's Michelle Brouhard estimated that tanker scarcity accounts for much of the current freight premium, with inefficient routes and transfers adding another 20%. The arithmetic of the fleet explains why. Of 923 VLCCs worldwide, Kpler said, about 120 Iranian vessels are effectively unavailable to conventional charterers. That leaves 803, of which 766 are employed, roughly 95% of the remaining fleet. The share of VLCCs carrying cargo is around 42%, against a historical average of roughly 45%, so ships are sailing in ballast or shuttling rather than delivering.

Where the pain lands

Refiners pay the freight. Goldman's analysts, in the Bloomberg report carried by Yahoo Finance, warned that high rates may "reduce refiners' overall demand for crude as the effective price of delivered oil rises," and that "Higher freight rates for longer pose some upside risk to our Brent forecast."

Oil & Gas 360, summarising Goldman, reported that elevated freight can stop refiners from realising comparable reductions in delivered feedstock costs even when benchmark prices decline. The squeeze is already in margins. Kpler said Singapore topping margins have fallen below zero and Northwest European hydroskimming margins have turned negative, down from nearly $20/bbl a few months ago. Brouhard wrote that transportation costs have become a major obstacle to bringing oil prices down. Kpler warned that refiners paying more for crude while receiving less for products may be forced into further run cuts. The EIA, for its part, said tanker rates reached record levels in September and are adding upward pressure on delivered crude prices to refiners.

Consumers feel it downstream. The EIA said U.S. retail diesel averaged $6.29/gal in September and gasoline $4.35, and that East Coast distillate inventories sat 32% below their five-year seasonal average.

The main counter-argument

The best counter-argument is that freight is a symptom. Attacks on infrastructure, not ships, set the September price spike: the EIA said Brent averaged $114 that month and touched $131/b on September 15 after strikes on Saudi Arabia's East-West pipeline. Shut-ins, the EIA said, averaged 4.8 million b/d in September, down from 5.8 million b/d in August and 10.9 million b/d at the May peak. If wells keep reopening, the argument goes, freight will normalise on its own. The Oman-Dubai spread fell to $4.22 a barrel, its lowest since July, OilPrice.com reported, as shuttle shipping lifts Gulf exports.

That is real, but it is slow, and the official forecasts say so. The EIA expects most Middle East production to return to prewar averages by the end of 2Q27, with Brent averaging $87/b by 2Q27. Even then it forecasts $105 for 4Q26, $14/b above last month's outlook, and it raised that forecast despite expecting Middle East flows to increase. Goldman's baseline is $90 by year-end, with sustained shipping costs a risk to the upside. Oil & Gas 360 reported that slower recovery in Middle Eastern refined product exports could prolong tight bunker fuel supply. Morgan Stanley, per OilPrice.com, sees planned refinery maintenance peaking at 3.4 million bpd in the second quarter of 2027, keeping fuel markets tight until at least mid-year.

Recovering wells fix the supply of oil. They do nothing for the supply of ships.

What follows

If this reading is right, the usual signals mislead. A rising export tally no longer means a falling pump price, and the number to watch is the freight rate, not the Brent print. The winners are the owners of the scarce hulls, and the traders. Analyst Homayoun Falakshahi, in figures the Wall Street Journal published and International Business Times relayed on Yahoo Finance, estimated that reselling Iraqi crude can earn an extra $20 per barrel versus before the war, about $40 million for a supertanker cargo.

The most telling cargo this week is a small one. Russia plans to dispatch its first diesel cargo to the United States on Thursday, October 22, Oil & Gas 360 reported, with Deputy Prime Minister Alexander Novak saying the tanker would carry about 40,000 metric tons. A single ship, crossing an ocean, is news because ships are what the market is short of.