Just a few months ago, markets were wondering why crude was priced at only 100 dollars per barrel despite escalating geopolitical tensions. Today, the question has reversed: if physical supply conditions are improving, why is oil still trading around 100 dollars?
The answer lies in the gap between improving physical oil flows and a geopolitical risk premium that remains stubbornly high. In September, traffic through the Strait of Hormuz rebounded strongly, and total exports from the Middle East reached approximately 15 million barrels per day (mbd) by the end of the month. Three factors appear to be supporting this recovery:
- US naval support has become more effective, allowing more vessels to use the maritime route through Oman, boosting the confidence of tanker operators and facilitating additional ship-to-ship transfers.
- China appears to have played a significant role in stabilising regional flows, particularly those from Saudi Arabia, leveraging its relations with Iran to keep energy supply chains operational.
- Iran has likely adopted a more pragmatic approach, with some exporters effectively compensating Tehran in exchange for safe passage.
With greater volumes of oil arriving in the market and a reduced global deficit of just a few million barrels per day, one might reasonably expect a decline in crude prices. However, the market continues to incorporate a significant geopolitical risk premium. Depending on the methodology used, this premium is estimated at around 20-25 dollars per barrel, reflecting ongoing concerns about new disruptions. Therefore, the central question for the coming months is what could once again provoke a reduction in oil flows. Several risks stand out:
- Iran could intensify its attacks on tankers and commercial vessels, especially if it believes that the bolstering of US naval protection has excessively altered the balance of power to its detriment. The new increase in attacks observed in October could already be an early signal of this risk.
- A broader escalation affecting Gulf energy infrastructure cannot be ruled out. If Iranian exports remain constrained — and the US blockade seems effective so far — Tehran might decide that neighbouring producers should not be able to export freely either, raising the threat to pipelines, production facilities, and other regional energy assets.
- The United States could increase pressure on Iran. Despite recent efforts to calm the markets, the deployment of additional military assets in the region suggests that Washington may be trying to break the current deadlock.
- The Houthis and other Iran-backed militias continue to pose a significant threat, having already demonstrated their ability to disrupt oil infrastructure and maritime routes. In our view, however, the Houthis have acted largely opportunistically regarding oil flows, aware that control of a strategic waterway grants them considerable influence over an already stressed market, and seeking to be compensated accordingly.
Looking ahead, we expect the oil market to remain extremely sensitive to headlines. This was once again evident during the first week of October, when some reports indicated that the Pentagon was assessing possible strikes against Iran before the US midterm elections, prompting President Trump to adopt a more moderate stance the following day. These contradictory signals are likely to remain a defining feature of the market. Nonetheless, our base case scenario anticipates a gradual decline in crude prices from current levels, provided that sufficient volumes continue to transit through the Strait of Hormuz. The physical balance is improving, and the pronounced backwardation embedded in the futures curve should gradually normalise.
Although crude balances are improving, we believe that the main bottleneck has shifted to refined products, particularly diesel. Unlike crude supply disruptions, refining capacity shortages cannot be quickly resolved. Therefore, we maintain a positive outlook on diesel and gasoline. Several factors explain why refined product markets are much more strained than the crude market:
- Refining capacity remains limited due to two distinct conflicts. In Russia and the Middle East, it is estimated that between 5 and 6 mbd of capacity is offline, leading to new reductions in global product inventories (see Figure 1).
- Disruptions in Russian refining infrastructure are unlikely to disappear soon. Despite political calls for restraint, attacks have continued, and there are already early signs of a new intensification of conflict during the winter months.
- Expectations for a strong rebound in Chinese product exports may be overly optimistic. Freight rates have reached extraordinary levels: in some cases, the daily cost of transporting crude from the Middle East to Asia on a very large crude carrier (VLCC) has risen from around 100,000 dollars to over a million dollars. These costs make refineries more reluctant to import crude, ultimately reducing refined product production.
- Recent announcements of strategic reserve releases may provide less relief than headlines suggest. Much of the volumes come from already announced programmes, while discussions around diesel releases in Europe raise the question of whether strategic reserves are being depleted too soon. A new disruption could then further elevate diesel prices once these cushions have been eroded.
- Demand destruction remains surprisingly limited. Although diesel is trading at exceptionally high levels relative to crude, end-user demand has proven to be much more resilient than many market participants expected.
Natural gas presents very different situations in Europe and the United States. European gas prices have nearly tripled since the beginning of the year and remain supported by tensions in the Middle East, while disruptions to Qatari liquefied natural gas (LNG) supplies are now extending deeper into the winter season.
Together with exceptionally low inventories in some areas of Europe — particularly in Germany — this situation means that the market is heavily reliant on a mild winter. Although El Niño typically increases the likelihood of milder conditions in Europe, it can also elevate the risk of disruptions related to the polar vortex, causing brief but intense cold spells. This weather uncertainty helps explain why European gas prices remain above 80 euros per megawatt hour, reflecting the market's sensitivity to any increase in winter demand.
The US market presents a very different picture. Supply remains abundant, storage levels are solid, and associated gas production from the Permian Basin continues to rise. The commissioning of additional pipeline transportation capacity in the fourth quarter should further increase the available supply, maintaining a broadly oversupplied balance of supply and demand even if temperatures drop. In this context, we continue to view rises in US natural gas as selling opportunities.
