Oil is now flowing out of the Persian Gulf like before the Iran war. Why prices may still not come down anytime soon.

By Isabel Wang and Myra P. Saefong

Wednesday brings fresh jitters about a potential escalation of hostilities in the Persian Gulf

Global Brent crude was at $108.82 a barrel Wednesday as news reports suggested the potential for fresh hostilities in the Persian Gulf conflict.

Oil flows out of the Persian Gulf in October nearly returned to levels seen before the start of the Iran war, but traders remain wary about a fragile recovery.

Total crude exports in the region, or flows coming out of Iran, Iraq, Kuwait, Qatar, Saudi Arabia, the United Arab Emirates and Oman, recently recovered to within 10% of their previous levels in January and February, according to data compiled by TankerTrackers.com, a maritime intelligence firm tracking crude oil shipments (see chart below).

SOURCE: TANKERTRACKERS.COM

Iran exported around 1.5 million barrels of crude oil a day before the war, but that has fallen to zero since the U.S. reimposed its blockade in mid-July. Yet exports from Saudi Arabia, the world's largest oil exporter, have jumped 10% above their prewar average.

"So it's fair to say that tanker traffic has almost completely normalized, which raises the question: Why this isn't reflected in lower oil prices?" said Robin Brooks, senior fellow in economic studies at the Brookings Institution.

Oil prices have surged again in October, with both West Texas Intermediate (CL00) (CLZ26) and Brent crude (BRN00) (BRNZ26) up nearly 10% in the month to date. The Brent contract for December delivery ended nearly flat on Wednesday, at $108.82 a barrel, after hitting its highest level since May just last week, while WTI's December contract was off 0.7%, to settle at $97.15, according to FactSet data.

"Yes, we are starting to see recovery, but the issue is a large portion of those barrels have to take a more convoluted route," said Ben McMillan, chief investment officer at IDX Advisors. "You have a lot of oil still going through over-the-ground pipelines, shuttle tankers and even dark-fleet tankers, so there's still a premium in getting oil out of the Gulf, and there's an elevated cost to do so because the shipping is not fully resumed," he told MarketWatch Wednesday.

Indeed, the resumption of more robust oil flows hasn't been enough to bring oil prices down significantly, as continued attacks on vessels in the Strait of Hormuz and on Saudi Arabia's East-West pipeline have kept the cost of shipping crude elevated. President Donald Trump's promise not to attack Iran before the midterm elections slightly tempered the rise in crude prices earlier this month, but fears that U.S. military operations could resume after Nov. 3 are still keeping geopolitical risks elevated.

That's why the threat of more attacks on shipping and energy infrastructure still exists, and should result in "fluctuations" in the oil export level that gets out on any given day, said Michael Lynch, president of Strategic Energy & Economic Research.

"If markets were saturated, that would not be a big problem, but with inventories so thin, even the loss of 5-10 million barrels a week will keep prices elevated," he told MarketWatch.

U.S. commercial crude-oil inventories fell by 3.1 million barrels for the week ending Oct. 16, according to data released Wednesday by the U.S. Energy Information Administration. This marked the third consecutive weekly decline, pushing total crude stocks to roughly 412.5 million barrels.

The Middle East can't seem to go a day without another escalation. On Wednesday afternoon, Reuters reported that the State Department was planning to order the departure of some personnel from U.S. embassies in the Persian Gulf, including the evacuation of all embassy staff and their families from Saudi Arabia, citing U.S. government officials. AFP then reported that a diplomatic source said U.S. embassy staff and their families in Saudi Arabia, United Arab Emirates, Jordan, Qatar and Bahrain have been ordered to leave.

Separately, a source at Saudi Arabia's Ministry of Energy said air defenses intercepted a drone that attempted to attack a facility at Saudi Aramco's (SA:2222) Shaybah field, according to the Saudi Press Agency.

Still, the recent uptick in oil flows could be just the beginning of the normalization. Michael Hsueh, commodities analyst at Deutsche Bank Research, said further normalization of oil flows through the Strait of Hormuz would see the oil market swing into a large surplus, which could eventually bring oil prices down to $74 a barrel next year.

"A negotiated ceasefire leading to broader talks remains the path in our base case of Brent at $74 a barrel in 2027, while an extended war throughout 2027 would suggest Brent moving higher toward $130," he said in a Wednesday client note. "In the meantime, restored crude-oil flows remain precarious and refinery crack spreads are likely to stay high."

A crack spread is the difference between the price of one barrel of crude oil and the price of the refined products made from it, such as gasoline or diesel.

-Isabel Wang -Myra P. Saefong

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10-21-26 1714ET