Middle East · Energy

Middle East Conflict Reshapes Global Oil Trade Routes Amidst Rising Prices

Escalating conflict in the Middle East is forcing a significant realignment of global oil trade, leading to increased shipping costs and a potential long-term shift in energy market dynamics.

News AutomationCompiled 08:05 UTC · 1 min read

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Iran War Forces a Rewrite of Global Oil Trade Routes

By Irina Slav

Middle Eastern exporters are rapidly developing alternative routes as Hormuz oil flows plunge from nearly 20 million bpd to an estimated 6–8 million bpd.
Energy importers are diversifying away from Middle Eastern supplies, but longer shipping routes and higher freight costs are driving up import bills.
The global oil market could be permanently reshaped, becoming less dependent on critical chokepoints like Hormuz but structurally more expensive.

Offshore oil rig

Oil prices are about to book yet another weekly gain as the war in the Middle East remains hot, with a pessimistic outlook. Oil exporters from the region are rushing to diversify their export channels, and importers are rushing to diversify their suppliers. The oil market is changing in what may well prove to be an irreversible way.

The Strait of Hormuz is one of the biggest export routes for crude oil—and liquefied gas—in the world. Before the first U.S. and Israeli strikes on Iran, the strait handled close to 20 million barrels daily of crude oil exports from the Gulf States. Now, daily oil flows via the chokepoint are estimated at between 6 and 8 million barrels daily. With LNG, things are even more severe, with Qatar, the region’s largest producer, struggling to export at least some gas amid a force majeure following damage to its Ras Laffan hub as Iran retaliated for U.S. strikes.

Yet there is another oil export route out of the Middle East, and that is the Bab el-Mandeb Strait on the other side of the Arabian Peninsula. Saudi Arabia was quick to take advantage of this fact, reversing the flow along its East-West pipeline to take the oil not to the east, and Hormuz, but to the west, and the port of Yanbu. However, this redirection has had its costs: the port of Yanbu does not have the capacity to handle as much oil as the Persian Gulf ports. Related: High Oil Prices Speed Up China’s Shift Away From Crude

The UAE redirected its own flows to the port of Fujairah, which sits outside the Strait of Hormuz and as such is less vulnerable to attacks. Yet the UAE also ran into the problem of capacity. ADNOC now plans to double the capacity of the pipeline that carries crude to Fujairah, but this will take until at least next year, per official plans.

Essentially, any oil-exporting state that has alternative routes is exploiting them, and if it does not, it is planning to build some. This will certainly reshape the regional oil export channels, with the Strait of Hormuz potentially losing its significance in the long run. It won’t lose it in the near term because all those alternative export routes take time to build, as noted already.

Importers are also adjusting. The global total energy import bill swelled by $330 billion over the six months between March and August from what it was expected to be, Finland-based climate outlet CREA reported last month. In other words, the war between the United States and Israel, and Iran, had caused a rise in oil and gas prices that added a combined $330 billion to the price tag of these imports—and prices are rising further as it dawns on persistently optimistic traders that TruthSocial posts by President Trump cannot change the course of the war.

Both Brent crude and West Texas Intermediate are currently trading at over $90 per barrel, and there is a possibility that even if they decline in the coming days and weeks, they will not decline by as much as they did three months ago, swinging on a social media post. This is the effect of the transformation of oil markets—because that transformation has a price.

Asian energy importers were the biggest clients of Middle Eastern oil and gas producers because of the favorable geography that meant favorable prices. Now that importers are forced to search for alternatives, they must pay higher prices because the geography of most of these alternatives is less favorable and it takes tankers longer—sometimes a lot longer—to reach their destination.

Japan is a case in point. Before the U.S. and Israeli war with Iran broke out, Japan relied on the Middle East for almost all of its crude oil imports, which are vital for the resource-poor country. After the war, the Japanese government rushed to secure alternative suppliers. These include the United States, Canada, African oil producers, and Azerbaijan. The price: a record import bill of $76.39 billion for July, likely to be eclipsed by the August bill as reliance on oil and gas suppliers further out in the world strengthens.

Japan is a case in point, but it is not the only one. Every energy-importing nation in Europe is in a similar position, not least because of EU sanctions on Russian oil and gas, which have created additional pain in the region, while China and India have happily boosted their imports of Russian crude to replace some suddenly unavailable Middle Eastern crude.

The global oil and gas market is changing—fracturing, as some commentators have called it. It remains to be seen whether the transformation will be completed, which would require a further extension of the Hormuz disruption, which is a painful prospect. The silver lining, for whatever it’s worth, would be a global oil export network less reliant on a couple of critical waterways that can be paralyzed by war—but also a network carrying more expensive oil.

By Irina Slav for Oilprice.com

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Irina Slav

What I Cover Irina Slav has been writing about global energy markets since 2007, covering the oil and gas industry, energy security, commodities, and the…

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