ROI-Don't mistake Mideast oil rebound for normality: Bousso

Crude oil prices remain near five-month highs despite a recent surge in Middle East crude exports ​above pre-war levels and intensifying Iranian attacks on tankers in the Strait of Hormuz. This suggests investors may already be bracing ​for another round of regional escalation. The rebound in crude flows from the Gulf is ‌striking. ​Middle East oil exports have averaged 17.3 million barrels per day (bpd) so far in October, up from 16.4 million bpd in September and above the 16.9 million bpd average in the two months before US-Israeli strikes on Iran began on February 28, according to Kpler data.

This reflects a surge in flows through the embattled Strait of Hormuz. Flows hit 11.7 million bpd in October, up from 9.75 million bpd in September. ‌While still around 82% of pre-war levels, Hormuz flows are far above their wartime nadir of less than 1 million bpd in April, excluding Iranian oil, according to Kpler. The increase is largely thanks to the growing use of ship convoys that sail through the strait close to the Omani coastline under US naval protection. Shipping data suggests around a third of crossings continue to use the Iran-controlled northern route, most likely in coordination with Tehran, but those flows remain opaque.

The sustained traffic is a clear sign that Gulf producers and tanker owners are willing to tolerate the risk of attack. Last week, ‌the United Kingdom Maritime Trade Operations, an industry security advisory, reported 12 attacks in or around Hormuz, a record high. The agency said the actual number was probably much higher because many vessel owners do not report attacks, likely for commercial or security reasons.

The broader recovery ‌in regional exports has also been helped by the rapid rebound in Saudi shipments from the Red Sea port of Yanbu. An attack last month by Iran-backed Iraqi militias on a vital pipeline linking the kingdom's eastern oilfields with its western coast had crippled flows for weeks. Saudi Arabia’s Red Sea exports have averaged 3 million bpd so far in October. While below the wartime peak of 4.3 million bpd in June, that still represents a much faster-than-anticipated recovery.

NEW ABNORMAL Higher flows should not be mistaken for a return to normality.

Benchmark rates for a tanker carrying 2 million barrels of crude from the Middle East to China remain near an all-time high of around $1.4 million a day, more than 12 times pre-war ⁠levels. Tanker insurance costs ​have also risen to around 10% of the value of the cargo, up ⁠from roughly 3% before the war. Those extraordinary logistics costs are weighing heavily on refiners.

Middle East producers have responded by offering large discounts to offset those costs. In a bid to secure buyers for their oil, Saudi Aramco and Abu Dhabi National Oil Co have also started selling some cargoes on a delivered basis to buyers in China and ⁠India, a sharp departure from the common practice of selling crude at the point of loading. Gulf producers are willing to risk sending tankers carrying cargoes worth more than $220 million through treacherous waters because securing export revenues and defending market share outweigh the mounting cost and danger of getting those barrels to customers.

Producers and consumers have ​rapidly adapted to this “new abnormal,” creating a system that can deliver large volumes of crude, but only through an expensive and increasingly elaborate web of multi-ship transports, military protection, heightened insurance fees, hefty discounts and altered sales terms. ADAPTATION ILLUSIONS

On the surface, the adaptation appears ⁠to be working. The global volume of crude oil aboard tankers rose this week to around 157 million barrels on a four-week average, slightly above the level a year ago.

Yet despite the recovery in physical supplies, benchmark Brent crude has climbed in recent days to around $110 a barrel, the highest price since May and not far off the wartime peak of $118 reached ⁠in ​March. The divergence between abundant barrels and rising prices suggests traders are concerned not about the amount of oil available today, but about whether Middle East exports can be sustained if – or, perhaps, when – fighting intensifies again.

Meanwhile, daily trading volumes in ICE Brent options jumped on Tuesday to a record of more than 1 million lots, according to HiLo Analytics, another indication that producers and consumers, including refiners and airlines, are rushing to protect themselves against another violent swing in oil prices. Those concerns are growing ahead of Israel's general election on October 27 and the US midterm ⁠elections one week later. President Donald Trump has said the US will not attack Iran before US polls, but he has sent additional warships to the region while threatening future attacks against Iranian nuclear facilities.

Renewed diplomatic efforts involving Pakistani and Qatari mediators this week offer a path ⁠forward, but, if the signals coming from Tehran and Washington are any guide, ⁠they are unlikely to produce a breakthrough any time soon. The global energy system has proved far more resilient than seemed possible during the darkest days of the Iran war. Yet that adaptability comes at a cost, and producers, consumers and investors appear to believe it may keep rising.

(The opinions expressed here are those of Ron Bousso, a columnist for Reuters.) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source ‌for global financial commentary. Follow ROI on LinkedIn, and ‌X.

And listen to the Morning Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news ​in markets and finance seven days a week. (Ron Bousso; Editing by Marguerita Choy)