Crude Oil Prices Slip as Oil Supplies Leave the Middle East

November WTI crude oil (CLX26) is down -0.62 (-0.61%) today, and November RBOB gasoline (RBX26) is down -0.147 (-0.45%).

Crude oil and gasoline prices are sliding today amid a stronger dollar and signs that crude supplies are moving out of the Middle East.  Losses in crude are limited amid ongoing hostilities in the Middle East that are disrupting energy supplies from the region as Houthi rebels from Yemen continue to launch missile and drone attacks against Saudi Arabia, and Iran continues attacking tankers attempting to transit through the Strait of Hormuz.

Crude prices are under pressure today as oil supplies leave the Middle East.  US Energy Secretary Wright said Persian Gulf oil flows have recovered to about 80% of their pre-war level, though refined-product shipments remain constrained.

Crude oil is supported by concerns about disruptions to Middle Eastern crude supplies after Houthi rebels in Yemen targeted Yanbu in Saudi Arabia, a significant Red Sea port for Saudi oil exports that avoids the Strait of Hormuz, with missiles and drones. Also, the UK Maritime Trade Operations reported that two tankers were attacked in the Persian Gulf near Saudi Arabia's port city of Jubail.   

Goldman Sachs estimates there's a $24-a-barrel risk premium in crude oil prices due to the Middle East conflict.  However, if Europe releases half the diesel it has announced from reserves, fair value prices could fall by about $11 a barrel.

Surging freight costs to ship crude out of the Middle East, driven by Iranian attacks on ships in the Strait of Hormuz, are bullish for crude prices.  The cost to ship oil from the Middle East to China recently jumped to $1.4 million a day, the most on record. 

Higher Saudi crude output is bearish for crude prices.  Saudi Arabia said its Sep crude production rose by 2 million bpd (+40% m/m) to 8.732 million bpd, recovering from a 36-year low in August. 

Another bearish factor for crude was the recent action by Saudi Aramco to cut the price of its Arab Light crude to Asian buyers by $5 a barrel below a regional benchmark for November delivery, a wider cut than the expected $5 a barrel increase.

The advances by the Houthi rebels to take territory along the Red Sea in Yemen are also contributing to concerns about tighter oil supplies from the Middle East.  Last month, the Houthis captured a pair of islands near the Bab-al-Mandeb Strait.  That followed their seizure of Perim Island and the Red Sea port city of Mokha at the southern end of the Red Sea, putting the group in a stronger position to attack ships.  Since the closure of the Strait of Hormuz, Saudi Arabia has pivoted to the Red Sea to export most of its oil over the past two months.  However, escalating tensions with the Houthis have disrupted that route. 

The US and Iran remain at odds over key issues, including control over the Strait of Hormuz. Iranian President Pezeshkian recently said that Iran won’t allow freedom of navigation through the Strait of Hormuz while sanctions and a US blockade remain in place.

Ukraine has intensified drone attacks on Russian oil infrastructure, curbing Russian crude production and exports.  Ukraine attacked Russian fuel-producing plants 15 times in September and 22 times in August, targeting five of Russia’s ten largest oil-processing plants.  According to EA Analytics, Russian crude-processing rates averaged 3.51 million bpd in July, the lowest in 24 years, amid damage to Russian energy infrastructure caused by drone and missile attacks from Ukraine. Russian crude processing rates recovered slightly to 3.98 million bpd in September as damaged refineries struggle to come back online.

On the bearish side for crude, the International Energy Agency (IEA) on September 11 warned that high oil prices and restricted oil supply will cause the biggest drop in global oil demand this year since the Covid-19 pandemic.  Despite the projected demand drop, the IEA raised its estimate for this year’s global oil deficit to 1.7 million bpd from last month’s 1.3 million bpd estimate due to the restricted supply caused by the US-Iran war. The IEA said the return of a global oil surplus will be delayed until 2027, later than its previous estimate of late 2026.

On October 4, OPEC+ agreed to keep oil production quotas unchanged for November.  As a bearish factor for crude, OPEC delegates on August 2 approved their final increase of +188,000 bpd in crude production for September. The group has now restored all 1.65 million bpd of the supply cutback it made in 2023 and said it plans to hold output steady for the rest of the year after the September hike.  However, OPEC+ may struggle to deliver planned production increases amid persistent US-Iran military attacks in the region.  OPEC's Sep crude production rose by +1.12 million bpd to 20.71 million bpd. 

Vortexa reported today that crude oil stored on tankers that have been stationary for at least 7 days fell -11% w/w to 85.45 million bbl in the week ended October 16.

Last Thursday's EIA report showed that (1) US crude oil inventories as of October 9 were -2.4% below the seasonal 5-year average, (2) gasoline inventories were -4.2% below the seasonal 5-year average, and (3) distillate inventories were -11.7% below the 5-year seasonal average.  US crude oil production in the week ending October 9 fell -2.1% w/w to 13.679 million bpd, falling from a record high of 13.979 million bpd the week of October 2.

Baker Hughes reported last Friday that the number of active US oil rigs in the week ended October 16 fell by -3 to 459, falling back from a 16.75-month high of 462 rigs on October 9.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.