The energy market continues to mistake adaptation for normalization.
That’s what Standard Chartered Bank Energy Research Head Emily Ashford said in a report sent to Rigzone recently, which outlined that the system “can move barrels, but at a great cost and logistical complexity”.
“Gulf crude oil export volumes have recovered as increasingly expensive and fragile workarounds are functioning, while policy makers are using inventories and keeping trade open to manage the downstream consequences,” Ashford noted in the report.
The Energy Research Head highlighted that normal Gulf export volumes do not mean normal flows.
“Gulf crude exports have recovered strongly, returning towards pre-conflict volumes on several days in September,” Ashford said.
“However, focusing on headline volumes misses how complex the process to get those barrels moving has become, including ship-to-ship (STS) transfers in the Gulf of Oman and naval escorts,” Ashford added.
“This has worked to restore export capacity, but at the cost of additional vessels, longer journey times, higher freight and insurance costs, and continued exposure to attack,” Ashford warned.
“Indeed, the recovery itself could intensify the logistical squeeze, as additional exports compete for scarce tanker availability. While normalization has not been achieved, the engineered resilience is impressive,” Ashford went on to state.
In a report sent to Rigzone by the Standard Chartered Bank team on October 2, Ashford said Hormuz flows were normalizing in volume but not mechanism.
“Total crude and condensate export volumes from the Gulf – including Hormuz and bypass routes such as Fujairah and the Red Sea – are recovering strongly, representing a remarkable achievement by the system to adapt to extraordinary disruption,” Ashford noted in that report.
“Early estimates suggest that September exports (excluding Iran) reached c.16.5 million barrels per day, broadly back to pre-conflict volumes,” Ashford highlighted.
“However, only 60 percent crossed the Strait, versus 83 percent pre-conflict,” Ashford pointed out.
“In our view, this represents resilience rather than normalization; while volumes are recovering, efficiency is not,” Ashford stated.
In this report, the Standard Chartered Bank Energy Research Head noted that the system “has been forced to engineer increasingly complex workarounds, like the vessel-intensive logistics chain of ship-to-ship transfers, with shuttle tankers moving through the strait for transfer in the Gulf of Oman”. Ashford added, however, that “capacity appears saturated, vessel utilization is inefficient, voyage times have lengthened, and both freight and security costs remain elevated”.
Ashford went on to note in this report that the recovery in physical flows “reduces the probability of the most extreme shortage scenarios and should gradually erode some of the scarcity premium embedded in prices”.
Ashford warned, however, that higher flows have come with higher costs, lower efficiency, and greater operational complexity, “leaving the system less able to absorb a future shock”.
“While these developments are bearish relative to a market pricing prolonged physical supply loss, they do not justify a return to pre-war risk premiums, in our view,” Ashford said.
“The system is more resilient than feared, but also more fragile and expensive than before,” Ashford added.
Adaptation Above Diplomacy
A blog posted on Kpler’s website on October 1, which was penned by Matt Wright, Lead Freight Analyst at Kpler, revealed that Kpler is moving away from the assumption that reopening the Strait of Hormuz requires a comprehensive political agreement.
“Our base case will instead reflect slower, uneven normalization under continued conflict, with shipping recovering through operational adaptation rather than following a single diplomatic trigger,” Wright revealed in the blog.
This better reflects what the physical market is already showing, according to the blog.
“The consensus view had been that a political deal was necessary to reopen the Strait. Instead, rising transits show it is being prized open operationally,” Wright said.
“Indeed, transits have risen despite persistent hostilities, challenging the previous assumption that sustained attacks would keep traffic close to zero,” he added.
Wright noted in the blog that rising transits show that flows can recover through escorts, ship-to-ship logistics, operational adaptation, and intermittent diplomatic relief without waiting for a comprehensive U.S.-Iran settlement.
“Diplomacy remains important, but it is no longer the trigger,” Wright said.
“Washington appears willing to sustain economic pressure while facilitating shipping,” he added.
“Deteriorating conditions in Iran increase the incentive for intermittent negotiations and temporary arrangements rather than necessarily producing a comprehensive settlement,” he continued.
Wright went on to state in the blog that crude was demonstrating both the potential and the cost of managed normalization.
“Middle East crude flows have recovered materially, but continued security risks are keeping freight elevated,” he said.
“A diplomatic solution may not be necessary to restore physical supply, but without one, delivered crude prices are expected to remain high,” he warned.
Wright also pointed out in the blog that commodity tolerance remains uneven.
“Dry bulk is not yet creating sufficient pressure to force political action, while LNG can withstand slower normalization at a cost to European balances,” he said.
“Refined products remain the principal constraint and the market most likely to challenge the new base case,” he added.
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