Crude Oil
Crude Rallies Above $100 as Escalation Risk Extends Farther Out the Curve
Crude prices remained elevated this week as escalating attacks on regional shipping and limited diplomatic progress offset a continued recovery in Persian Gulf exports. Kpler estimates total exports from Gulf producers excluding Iran averaged 24.6 MMBbl/d in the week ending October 18, above the 23.3 MMBbl/d prewar average. However, direct shipments through the Strait of Hormuz remained more than one-third below prewar levels, with alternative pipelines, Red Sea loadings and ship-to-ship transfers supporting the broader recovery.
The recovery therefore remains heavily dependent on alternative routes and a more complicated shipping system that remains vulnerable to disruption. Regional attacks continued throughout the week, while the Houthis claimed Friday to have targeted Saudi Aramco facilities in Yanbu. The Red Sea port is particularly important because it serves as the western terminus of Saudi Arabia’s 7 MMBbl/d East-West pipeline, making any disruption there a direct threat to one of the region’s primary alternatives to Hormuz.
Transportation costs also remain exceptionally high despite the increase in export volumes. Goldman Sachs estimates the average cost of moving crude has climbed above $20/Bbl from roughly $3/Bbl a year ago as war-risk premiums, higher fuel costs and greater reliance on ship-to-ship transfers strain tanker availability. Elevated freight raises the delivered cost of crude, pressures refinery margins and can redirect trade toward shorter-haul supplies even when headline export volumes remain strong.
Geopolitical risk has also extended farther out the curve. Cal 27 WTI traded above $87/Bbl and Cal 28 above $77/Bbl at points this week, a sharp repricing from levels seen only several weeks ago. The IEA has said it sees little prospect of a return to normal market conditions in 2027, while Morgan Stanley raised its Dated Brent forecasts for the final three quarters of next year amid persistent Middle East and Russia-Ukraine supply risks and a heavy refinery-maintenance schedule.
AEGIS maintains a bullish view on Bal 26 WTI. Higher Middle Eastern exports have provided some physical relief, but those flows remain dependent on vulnerable pipelines, STS operations and elevated-cost shipping routes. The recovery itself could also increase escalation risk, as Iran or its regional allies may seek to intensify attacks on shipping and energy infrastructure to regain leverage as export volumes return toward prewar levels. Continued attacks and limited diplomatic progress therefore leave near-term risks tilted to the upside, while a durable normalization in regional flows remains the primary downside risk.
We remain neutral on Cal 27. The underlying 2027 supply-and-demand balance remains considerably more bearish if Middle Eastern production and trade normalize, but persistent geopolitical disruptions, depleted inventories and significant damage to refining capacity in the Middle East and Russia could delay a broader return to normal market conditions.