Middle East Oil Supply Recovers, But High Fuel Costs Here to Stay: Jefferies
Jefferies reports Middle East oil supplies are back to 90% of pre-conflict levels, yet high freight and gas prices keep energy costs under pressure.
While the global energy market is seeing a sigh of relief as Middle East crude exports bounce back, the relief may not reach the consumer's pocket anytime soon. A recent report by Jefferies reveals that crude oil supplies from the Middle East have recovered to over 90 per cent of their pre-conflict levels, yet a cocktail of high shipping costs and rising gas prices continues to keep energy expenses under significant pressure.
Crude Supply Bounces Back Despite Gulf Tensions
Despite ongoing attacks in the Gulf of Oman, the flow of crude oil from the Middle East (excluding Iran) has shown remarkable resilience. The report highlights that exports have surged back to more than 90 per cent of the levels seen before the conflict began.
This improvement in supply is further evidenced by the physical crude premium, which plummeted by 65 per cent in a single week, dropping to USD 9 per barrel. This sharp decline suggests that crude is becoming more readily available in the physical market.
The Shipping Nightmare: Freight Rates Skyrocket
If the oil is flowing, why are costs still high? The answer lies in the logistics. Jefferies warns that shipping costs have become a massive burden. Freight rates are currently hovering around eight times the levels recorded at the start of the conflict.
To put this in perspective, freight now accounts for more than 25 per cent of the landed cost of crude oil. Before the conflict, this cost was a mere 3 per cent. With continued attacks on oil tankers, these elevated shipping rates are expected to persist in the near term.
Refining Margins and the Burden on OMCs
The report also dives into the refining sector, noting that while margins have dipped slightly week-on-week, they remain stubbornly high. In Singapore, gross refining margins averaged USD 14 per barrel for the year-to-date period of FY27.
The price spreads for specific fuels remain elevated:
- Diesel: USD 69 per barrel
- Aviation Fuel: USD 68 per barrel
- Gasoline: USD 26 per barrel
This environment is creating a financial squeeze for Oil Marketing Companies (OMCs). Based on 15-day average pricing, marketing losses for petrol and diesel are estimated at Rs 28 and Rs 34 per litre, respectively. Procurement costs have been comparable to an Indian crude basket price of USD 120 per barrel.
Gas Prices and Petrochemicals
The energy crisis extends beyond oil. Spot liquefied natural gas (LNG) prices have climbed 12 per cent week-on-week, averaging USD 29 per million British thermal units. With European gas storage at 75 per cent—lower than the 83 per cent seen last year—and winter approaching, gas prices are expected to stay high, stretching domestic affordability.
On a brighter note, the petrochemical sector is seeing a boost. Margins for polyethylene, polypropylene, and polyethylene terephthalate have jumped 68 per cent compared to the end of February. This trend is particularly beneficial for the oil-to-chemicals profitability of giants like Reliance Industries.
A Brief Reprieve from US Sanctions
In a move that provides some breathing room for major importers like India and China, the US has waived key duties linked to its Russia sanctions legislation for a period of 60 days. This temporary measure is expected to ease some of the pressure on countries relying on Russian crude.