Crude and oil products markets shaken by major conflict in the Middle East

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Herman Wang:

War in the Middle East, attacks on energy infrastructure, and jitters in the market. Welcome to another Platts Oil Markets Podcast. I'm Herman Wang, head of oil news for Asia and EMEA, and I'm joined today by Lauren Holtmeier, our senior news editor in Dubai, Gary Clark, our associate director of price reporting for EMEA Clean Refined Products, and Ada Taib, our associate director of price reporting for OPEC Crude and Fuel Oil.

This is a war that our colleagues at S&P Global Energy Sarah say has the potential to be the largest oil supply disruption in history if it escalates and the hostilities are sustained. So let's start with you, Lauren, because you are on the ground in Dubai, listening to the drones flying overhead, and you've been covering all the developments since the attacks first started on February 28th. It's been a busy time for you. What's it been like reporting on all this fast-moving news and how have you and the rest of the news team in the Middle East been covering it?

Lauren Holtmeier:

Yeah. So we are in day 4 of drone strikes out here, most of which have been intercepted overhead. And so a lot of the damage we're seeing, or maybe some of the damage, is simply because they can't control where the debris lands.

We have seen the strikes evolve over the last 4 days. So the first day it was a lot of tourist infrastructure. We saw hotels hit. We saw the airports in Abu Dhabi, Kuwait all hit. Day 2, they moved to targeting ports, Duqm in Oman, Jebel Ali in Dubai, and some more military targets. And by day 3, we really got into seeing strikes on energy targets, and we've seen Ras Tanura's refinery in Saudi Arabia hit. There was an incident at the Mina Al Ahmadi refinery in Kuwait, but they said operations are normal. And also the Ras Laffan industrial area in Qatar, which ultimately forced Qatar to announce that they were suspending LNG exports. We've also seen disruptions in Fujairah to operations at their terminal, but they seem to be fairly minimal so far. And we've seen incidents reported near Abu Dhabi at a facility there that belongs to ADNOC.

We've seen some production in Iraq be impacted with exports in Kurdistan in the north coming off substantially and producers up there announcing that they would shut in some fields. Which brings us to day 4, where energy infrastructure seems to be the preferred target yet again today. We are seeing incidents at Duqm in Oman for a second time. We're seeing incidents in Fujairah in the UAE being reported. Now, where we go from here? Trump has said this could go on 4 to 5 weeks, so we may be just getting going here.

Herman Wang:

Yeah, and we've seen markets respond to this already. We'll get into those markets in a second. But this region is kind of the epicenter for oil and gas production. What has been the response from the governments that you've seen in response to these attacks?

Lauren Holtmeier:

The overall sense I get from the governments is there is a desire to keep things moving as normally as possible. They have acknowledged hits or debris falling on infrastructure in some cases, but they've been very hesitant to say there's any disruptions to operations. There were disruptions at Jebel Ali for a day or so, but operations at Fujairah, as far as we know, are still mostly going on as normal. ADNOC has not said anything about its operations being impacted so far. However, a lot of the impact, I think, is going to be hard to parse right now. A lot of it is going to depend on how extensive the damage is, what exactly it hit, and how those impact the broader value chains of those companies and how long it takes to repair them. So Ras Tanura's refinery is still partially suspended.

Herman Wang:

Well, of course, all eyes are on the Strait of Hormuz, it's that narrow choke point between Iran and Oman that leads in and out of the Persian Gulf. Some 20.8 million barrels per day of crude and refining products was going through there. Now a lot of that has halted. There are some alternative routes for producers to get their crude and products outside the Strait. Lauren, can you tell us what those routes are and can they replace the flows going through Hormuz?

Lauren Holtmeier:

Yeah. Not being able to move things through the Strait is obviously a very big deal. Right now, there's about 70 million barrels of oil building up in tankers waiting to transit through that straight, our commodities at sea team said yesterday, and that compares with normal volumes of about 45 million barrels a day. So we can see producers wanting to get crude out while they can. I should also note that JP Morgan said they estimate that even upstream production could have to be shut in within 21 days if there are no vessels willing to transit the Strait. Hopefully this doesn't last that long.

In terms of alternative routes, we have some producers in the Gulf who have no other options. Those include Kuwait, Qatar, and Bahrain who rely entirely on the Strait to export their crude and products. Aramco ships most of its crude from Ras Tanura on the East Coast just north of the Strait, and those shipments have, in the past, been above 5 million barrels a day. So that's a solid amount of crude moving through the Strait for Aramco. Now, Aramco could switch some of that and some of those exports to Yanbu on the West Coast, but it might not be enough and we've seen one tanker already reroute from Ras Tanura to Yanbu. There's a pipeline that runs from east to west across Saudi, and it can expand its capacity to seven million barrels a day on short notice. But we've talked to analysts previously who have said that that was untested, and it's just not clear if they could get that capacity expanded to reroute all of their exports. And Yanbu exports typically a mere fraction of what goes out of Ras Tanura.

In the UAE, you have Fujairah, which sits just outside of the Strait, and Adnoc could, in theory, shift about 1.8 million barrels of its exports, so roughly half of its exports that they could reroute from their main hubs on the straight to Fujairah. For Iraq, your options are a lot harder. And we're seeing some signs already that loadings are disrupted, with no loadings on February 28th, and there were none yesterday, but on the 1st, there were 2 million barrels loaded. So we're seeing kind of patchy reporting so far.

Now, Iraq exports almost all of their crude from Basra right at the mouth of the Strait, and so it's more challenging for them to have any other alternative route. They've said that, "We want to develop alternative routes," but they're just not there yet. They do have the Iraq-Turkey pipeline in the north that goes to Ceyhan and dumps into the Mediterranean, but recently that's carried about 200,000 barrels a day and 450,000 barrels a day back in 2023. Even if its nameplate capacity when it was built back in the 1980s is around 1.5 million barrels a day, it's very unlikely to be that now. So Iraq stands to be substantially impacted from any prolonged disruptions in the Strait of Hormuz.

Herman Wang:

Right. Yeah, that Strait of Hormuz is obviously so critical to flows of oil and gas. And let's bring Ada into discussion because Asia is the big customer for Middle East crudes, and we've seen the Brent-Dubai EFS blow out since the attacks. What are the implications of that for Asian customers of Middle East crude?

Ada Taib:

Yes. Indeed, Herman, the Brent-Dubai Exchange of Futures for Swaps, which is one of the key indicators of East-West crude oil, has risen to a 3-year high of $6.08 on March 3rd, which is today. Widening EFS, as you know, would mean that Brent-linked crude rates would be more expensive compared to grade price against the sour Dubai benchmark. So naturally what that would mean is Asian demand would gravitate towards the cheaper Dubai-linked rates.

However, with concerns around the Strait of Hormuz, and again, uncertainty on whether ships can transit into through the Strait, this has basically resulted in the Dubai cash future spread, which is the key indicator of fundamentals in the physical Middle East crude market, to have also reason to 3-year highs in tandem with the Brent-Dubai EFS.

So on March 3rd, Platts cash future Dubai spread was assessed at a premium of $7.76 per barrel, which is the highest we've seen since July 2022. So again, what this means for Asian customers is, regardless of whether the crude is Brent-linked or Dubai-linked, all in all, it will have to come down to what is most competitive on a delivered basis, again, taking into account the cost of freight as well. And unfortunately, as we all know, tanker freights are also at multi-year highs. So I would think a prolonged period of elevated high cost would ultimately, for Asian refiners, into their refining margin.

Herman Wang:

Now, more than 80% of the crude that goes to the state of Hormuz was going to Asian markets. A lot of focus on strategic stocks that a lot of countries have built up to try and mitigate any disruption like this. Of course, we're kind of getting into uncharted territory as this war drags out. And if that Middle East crude has trouble getting the market, in addition to the strategic stocks that they have, where will these Asian customers turn to for alternative supplies?

Ada Taib:

Yeah, you mentioned about strategic stock. So indeed, what we've heard from Asian refiners is that in the interim, that could potentially be what they're looking at, tapping into the reserves, which, as you know, China, over the past year, they have been buying quite a lot for the storage. So we understand their onshore storage has reached a record high of 1.31 billion barrels, which is the first time it has crossed the 1.3 billion barrel mark. And also what we understand is fit stock inventory at Shandong ports are also healthy. In India as well, talking about storage capacity, we understand it's at around 74 days of total net imports. So pretty healthy.

However, as you mentioned, a prolonged conflict in the Middle East would be challenging for Asian refiners. They have to compete for arbitrage barrels with buyers from other regions, Europe and the Americas. So grades that will come to mind include the Kazakhstan CPC Blend, which, as you know, have increased in terms of loadings to million barrels a day in recent weeks after repair works at the Caspian Pipeline Consortium terminal and the time this project was completed late January. So a lot of supply coming up for CPC. Alternatively, they may have to look at Norway's [inaudible 00:10:37], US WTI, Midland, which is an alternative to Murban. And I think also Asian refiners may have to turn to being more creative with blending heavier grids, possibly from North Latin Americas, with grade from West Africa, for example, to meet their preferred refining slate. Again, ultimately it will come down to what would be most competitive price-wise for these Asian refiners.

Herman Wang:

Yeah, absolutely. We've seen global crude flows impacted by the Russia-Ukraine war. This war here also has the potential to remake the whole map of how crudes flow into their key consuming regions. But it's not just crude markets that are impacted, Gary. Gary, you and your team are closely following the refined product markets, some of the energy infrastructure that has been hit, some of the refineries, whether directly or indirectly. Lauren mentioned Ras Tanura in Saudi Arabia, Mina Al Ahmadi and Kuwait. How are product markets reacting to these developments? And are there refineries in other regions able to fill any supply gaps?

Gary Clark:

Thanks, Herman. Yeah. So I mean, look, there's been a big impact on the refined products complex. I think the two products which are most affected are jet fuel and diesel. And why is that? So at the moment, there's no traffic transiting the Strait of Hormuz, as we said, so supply is locked in the Persian Gulf. And Europe, including the UK, took 50% of all of its jet fuel imports came from the Persian Gulf in 2025. And we look at diesel, it's around 20%. So Europe is incredibly reliant on Middle Eastern jet fuel and diesel barrels, and in particular, those barrels from the Persian Gulf.

So the question now is, well, how long is the conflict going to go on? When will traffic resume through the straight of Strait of Hormuz? But where can Europe's resupply come from? And one of the added complications here is, outside of the Middle East, Europe gets its middle distillates from the US, but also the West Coast of India. But since we've had Russia-Ukraine war, European sanctions on refined products produced in Russia, but also produced outside of Russia but processed from Russian crude, those imports into Europe are banned. And India has been processing a lot of Russian crude in the past. And so when that happens, those refined products made from that Russian crude can't come into Europe.

So the question is now are Indian refined product barrels out of the European Union's sanction scope? Can those barrels come back into Europe and provide a little bit more certainty around supply for European markets of both jet fuel and diesel? And just to give you example of how prices have reacted. So looking from Friday, Platts asses, 16:30 London timestamped, Jet CIF NWE Cargoes prices, as of the 3rd of March A.M., prices are up 43%. The flat price. In terms of diesel over that same time horizon for Northwest European Cargoes, prices are up 35%. So that really shows you how the market is reacting here.

Herman Wang:

Yeah. So those European sanctions on Russian oil on top of the war disruptions, having huge ripple impacts. And you're talking to traders all day. I just wonder, what's the sentiment among the traders that you talk to? How are they feeling about the situation and all these uncertainties in the market?

Gary Clark:

I think there's so many factors at play here and I think the concern really is, where is resupply going to come from? In particular for the diesel and the jet fuel. So with European markets being reliant on those are barrels, the other factor at play here is freight rates. So freight rates have increased enormously, and obviously that's going to increase the cost of arbitrage barrels into Europe.

But it's not just diesel and jet fuel markets that are being affected here. Gasoline, Europe's a little bit more insulated because we're kind of net long gasoline. We tend to be an exporter of that product rather than an importer. But the Middle East produces a lot of LPG, typically goes to Asia, naphtha typically goes to Asia as well, but if that supply is locked in, obviously that affects balances in Europe, and those are important blending components for gasoline. So people are looking, obviously, at the gasoline, the LPG, and the naphtha markets as well.

Herman Wang:

All right. Well, there's obviously a lot of fast moving developments and we're still in the early days. We've covered a lot of ground on today's discussion. There's still a lot that can happen. Of course, we at Platts will be keeping you updated with the latest news and market movements as they happen. Thanks so much to you, Gary, and to Lauren and to Ada for discussing all these developments with me today. Thanks for listening. I'm Herman Wang, and this has been the Platts Oil Markets Podcast.