Oil flows are up as Iran war turmoil eases. Why do prices keep rising?

Oil flows out of the Gulf have rose substantially, easing the enormous supply disruption caused by the United States/Israel war on Iran.

Key points

• On Friday, Brent crude front-month futures – contracts for oil deliveries in December – rose more than 2 percent to briefly top $117 a barrel.
• Observed inventories fell by 10 million barrels in September, taking the global stockpile to 509 million barrels below its pre-war level, according to the IEA.
• Escalation is very likely, Adi Imsirovic, a lecturer in energy systems at the University of Oxford, informed Al Jazeera.
• Oil producers have additionally ramped up exports that bypass the strait altogether via Saudi Arabia's East-West pipeline.
• Pavel Molchanov, an investment strategist at Raymond James & Associates, expressed scepticism that supply has returned to the pre-conflict trend.

Crude exports from the Gulf averaged 24.6 million barrels per day (bpd) in the week to October 18, exceeding the pre-war average, according to market intelligence firm Kpler. Yet, oil rates continue to rise.

Brent crude, the global benchmark, is trading at its highest rates since April, up more than 60 percent compared with before the war.

For context, the climbing rates reflect anxiety concerning the possibility of renewed hostilities in the US war on Iran, dwindling oil stocks, and the rose costs of transporting supplies out of the region, according to market analysts.

"The market is doing exactly what it is supposed to do: It is telling us there is plenty of prompt oil, but there is no end to this war in sight – in fact. Escalation is very likely, " Adi Imsirovic, a lecturer in energy systems at the University of Oxford, informed Al Jazeera.

"Therefore, futures markets reflect that expectation, " Imsirovic, a veteran oil trader, remarked.

Oil producers have become increasingly adept at responding to the volatile climate in the Middle East to keep supplies flowing.

Facing the threat of Iranian attacks on shipping in the Strait of Hormuz, shipping lines have established a shuttle system involving ship-to-ship transfers off Oman and the United Arab Emirates to reduce the distance any one vessel must travel in perilous waters.

Shuttle boats carry the oil through the strait and load it onto waiting tankers once they are out of the danger zone.

In August, more than 70 percent of the crude that crossed the strait did so via ship-to-ship transfers, according to Kpler.

Oil producers have additionally ramped up exports that bypass the strait altogether via Saudi Arabia's East-West pipeline. It carries oil supplies from its eastern oil fields to its Yanbu port on the Red Sea in the west, and the United Arab Emirates' Habshan-Fujairah pipeline.

As of September, 40 percent of exports from the Gulf were bypassing the strait, a conduit for one-fifth of global oil and liquefied natural gas supplies during peacetime, compared with 17 percent before the war, according to Kpler data. The soaring cost of delivery. Such workarounds have nonetheless come at a cost.

Freight costs have reached as much as $40 per barrel in recent weeks, regarding 10 times the usual rate, according to data from the London Stock Exchange Group, the surge driven by elevated insurance premiums along with logistical challenges.

October has been the deadliest month for attacks on commercial vessels since the start of the war, with 32 incidents logged by the United Kingdom Maritime Trade Operations (UKMTO) as of Friday.

"So barrels are moving, but neither smoothly nor reliably. That should not be read as a sign of normalisation, " Isabel Figuerola-Ferretti, an expert in oil markets at Comillas Pontifical University in Madrid, Spain, informed Al Jazeera. "Delivering a barrel has become far more expensive, " Figuerola-Ferretti remarked.

While market intelligence data has shown exports reaching pre-war levels at various points in recent weeks, the longer-term supply trend is less clear.

"The IEA's most recent production data – for September – shows OPEC Gulf production at 15.8 million bpd, which equates to 75 percent of the pre-war baseline, " Molchanov informed Al Jazeera, referring to the International Energy Agency's latest energy outlook.

"That slightly surpassed July's 74 percent to reach the highest level since the start of the war, but it's still a considerable distance from 100 percent." Meanwhile, oil stockpiles, a buffer during supply disruptions, are waning.

"The market has moved to a chronic squeeze, driven by concrete supply risks: Hormuz transit, shipping and depleted inventories, " Figuerola-Ferretti remarked. No reprieve anytime shortly.

With no permanent end to the Iran war in sight, few analysts see rates returning to normal anytime shortly.

Brent futures for delivery in October 2027 stood at more than $90 a barrel on Friday, in a sign that markets see normality as a long way off, still. "When could rates return to $70? Not shortly, " Figuerola-Ferretti stated.

"It would need durable de-escalation, a return to normal transit and shipping conditions through Hormuz, rebuilt inventories and freight costs back to normal, " she continued.

Molchanov, the investment strategist, remarked he did not believe supply could realistically exceed 85 percent of pre-war levels without a permanent diplomatic solution to the war.

"Once the political groundwork is in place, the next steps will be logistical: Demining Hormuz, bringing shipping crews back to work, and resuming production at currently shut-in oilfields, " he remarked.

For now, oil flows are up as Iran war turmoil eases. Why do prices remains the part of the story worth watching, and further updates are likely as more details are confirmed.