The global oil market is moving from an extraordinary supply crisis towards a potential surplus, as Middle Eastern producers cut prices to compete for buyers following the recovery of crude exports through the Strait of Hormuz. The shift highlights an unexpected consequence of the Iran war: a conflict that initially created one of the largest energy supply disruptions in modern history could leave behind an oversupplied and increasingly competitive oil market.
Brent crude fell more than 17% last week to approximately $97 per barrel, marking its steepest weekly decline since the COVID-19 pandemic in 2020. The drop followed the Republican Party’s heavy losses in the US midterm elections, which raised expectations that President Donald Trump’s administration could seek to de-escalate the conflict with Iran.
Even without a permanent peace agreement, recovering Gulf exports and increased production elsewhere are changing the supply outlook. However, the market remains far from normal, with damaged refining capacity, elevated shipping costs and depleted inventories complicating the recovery.
Oil Exports Through the Strait of Hormuz Recover
The recovery in Middle Eastern oil shipments has been particularly significant since September, when Gulf producers increasingly resumed exports through the Strait of Hormuz using tanker convoys protected by the US Navy.
Stay ahead of the geopolitical week.
MD Briefing delivers expert analysis across five global fronts — the Indo-Pacific, energy, geoeconomics, European security, and the Middle East — every Monday morning. Free.
According to Kpler data, crude exports through the waterway averaged 10.3 million barrels per day in October, compared with virtually zero during the first month of the war, excluding Iranian shipments. Before the conflict, the average stood at approximately 13.5 million barrels per day.
The recovery becomes even more substantial when alternative export routes are included. Saudi Arabia’s Red Sea port of Yanbu and the United Arab Emirates’ Fujairah terminal have helped Gulf producers maintain shipments despite continued security risks around Hormuz.
Combined regional crude exports reached 16.6 million barrels per day in October, approaching the pre-war average of 17 million barrels per day.
At the same time, producers outside the Middle East have increased output to benefit from elevated prices during the conflict. The United States, Brazil and Canada have all contributed to the expansion.
Global crude production reached 85 million barrels per day in October, exceeding the five-year average of 83 million barrels per day, according to Energy Aspects.
The combination of recovering Gulf supplies and increased production elsewhere is creating the conditions for a substantial global surplus.
Saudi Arabia’s Price Cuts Signal Intensifying Competition
The changing supply outlook is already reflected in the pricing strategies of major oil producers.
Saudi Arabia reduced the December price of its flagship Arab Light crude for Asian customers by $2 per barrel compared with November. The move widened its discount against the Oman-Dubai average to $6.50 per barrel, the largest discount since May 2020.
Spot premiums for Middle Eastern crude have also fallen sharply. Oman’s premium against the Dubai benchmark declined from $34 per barrel in mid-September to just 95 cents last Tuesday, before recovering slightly to $1.76 on Thursday.
These reductions reflect more than the recovery in production. Gulf exporters are also facing higher transportation and security costs as Iranian attacks on vessels continue despite US naval escorts.
Many producers have had to rely on expensive ship-to-ship transfers in the Gulf of Oman to move crude safely. As a result, tanker freight costs have climbed to approximately $30 per barrel, compared with around $5 before the war.
However, rising shipping expenses are only part of the problem. Producers are competing for a limited number of refiners capable of purchasing and processing the available crude.
Lower prices have therefore become an important tool for retaining customers as global supply expands faster than the market’s ability to absorb it.
Damaged Refineries Complicate the Oil Supply Recovery
The potential surplus is being intensified by damage to refining infrastructure in the Middle East and Ukraine.
Although crude production and exports are recovering, global refining capacity has declined significantly this year. Attacks on energy infrastructure in both regions have reduced the ability of refineries to process crude into gasoline, diesel and other petroleum products.
This creates an unusual imbalance. More crude is becoming available, but refiners have less capacity to convert it into finished fuels.
Refiners consequently have a wider choice of available crude supplies but weaker demand for additional purchases. Producers are competing for customers in a market where processing capacity, rather than crude availability, has become a major constraint.
Storage is not an easy solution either. The market remains in a structure known as backwardation, in which immediate oil prices are higher than prices for future delivery.
This makes storing crude economically unattractive because producers would incur storage costs only to sell the oil later at a lower price. With fewer attractive options for holding surplus supplies, exporters face greater pressure to reduce prices and secure immediate buyers.
Why an Oil Glut Is Not Guaranteed
Despite the growing evidence of oversupply, several factors could prevent the market from remaining flooded with crude.
The first is the possibility of a recovery in oil consumption. Elevated fuel prices during the conflict have forced consumers to reduce demand, while some Asian countries have introduced fuel rationing.
JPMorgan estimates that global oil consumption has declined by approximately 3.3 million barrels per day since the beginning of the war. However, some of this reduction may reflect postponed consumption rather than a permanent decline.
If prices fall and supply conditions improve, consumers and businesses could increase their purchases, absorbing part of the additional crude entering the market.
A recovery in damaged refineries could also strengthen demand for oil. If facilities in the Middle East and Ukraine return to operation faster than expected, refiners may be able to process larger volumes of crude into finished products.
Geopolitical developments remain another major uncertainty. A renewed escalation between the United States and Iran could once again disrupt shipments through Hormuz, tightening supply and reversing the current price decline.
Conversely, a durable settlement that restores normal navigation through the strait would reduce security and freight costs. It could also allow Gulf producers to increase exports further, adding to supplies from the United States, Brazil and Canada.
Gulf Producers Face Pressure to Protect Revenues
For Middle Eastern governments, the emerging market environment presents a difficult economic calculation.
The Iran war has damaged regional infrastructure and disrupted export revenues. As producers begin repairing their economies and replenishing public finances, they have strong incentives to maximise oil production and restore lost income.
However, increasing output in an already crowded market could place further downward pressure on prices. Producers may therefore have to balance the desire to recover export volumes against the risk of weakening the value of every barrel they sell.
The competition could also reshape relationships between Gulf exporters and their Asian customers, particularly as buyers gain greater bargaining power and access to alternative suppliers.
Saudi Arabia’s price reductions offer an early indication of how aggressively producers may compete once the immediate supply emergency recedes.
What Happens Next?
The future of the oil market will depend on three closely connected developments: the durability of any US-Iran settlement, the recovery of global refining capacity and the strength of oil demand as prices decline.
A lasting peace agreement could restore more predictable shipping through Hormuz, reduce transportation costs and allow Gulf exporters to increase supplies. Combined with higher production outside the region, this could create sustained downward pressure on crude prices.
However, renewed fighting, stronger consumer demand or a faster recovery in refining capacity could limit the surplus.
The Iran war initially transformed oil markets through scarcity and disruption. Its eventual end could produce the opposite problem, with producers competing for customers in a market struggling to absorb the available supply.
The global energy market emerging from the conflict is therefore unlikely to resemble the one that existed before February 28. Instead, it could be characterised by greater competition, tighter margins and a new struggle among exporters to protect market share.
With information from Reuters.
