Persian Gulf oil exporters are scrambling to reroute their crude from ports to pipelines to keep the world running and keep their oil money flowing and fueling their economies. Sanction waivers abound. Venezuela’s oil output has shot up to 1.25 million barrels daily. The world of energy after the end of the war in the Middle East will be a very different one from what we’ve become accustomed to over the last five years.
When the United States and Israel first fired on Iran, the overwhelming assumption was that first, Iran would never close the Strait of Hormuz, and two, after the closure became a fact, that it would only last for a few days, maybe a couple of weeks tops. Then, when it became abundantly clear that there is no expiry date on the Strait closure, oil exporters finally started making contingency plans.
News about pipeline plans in the Persian Gulf includes the UAE, which eyes an operational pipeline to the port of Fujairah by next year, demonstrating just how urgent the alternative route is to one of the largest oil exporters in the Middle East. The UAE’s exit from OPEC highlighted the urgency as well, even though it was seen as a pivot to more energy policy independence. It was, but it can also be interpreted as a move to make sure the oil flows.
For years, the UAE has been working to boost its crude oil production capacity to 5 million barrels per day by 2027. To that end, the UAE had consistently demanded that it should be allowed in the OPEC and OPEC+ production deals to use more of its growing spare capacity—and it has indeed been allowed to do so. The country, alongside Saudi Arabia, is one of the few in the region—and the world—that held spare production capacity before the Middle East war began.
Saudi Arabia itself is a case in point: the kingdom has been using its East-West pipeline to bypass the Hormuz blockade, becoming an example of actual contingency planning and oil flow diversification in case of trouble in the neighborhood. Now, even Iraq is talking about boosting its pipeline capacity up to threefold—and doing it within three months.
Crude oil production from Iraq’s southern fields has plunged by 70% since the start of the U.S. and Israeli war on Iran, with the average production at 1.3 million barrels per day, compared with 4.3 million bpd before the war began. This makes OPEC’s number-two perhaps the most severely affected oil producer in the Gulf, because it is almost entirely reliant on the Strait of Hormuz for its exports.
“The legacy of the crisis will result in the construction of infrastructure to bypass the Strait of Hormuz,” Hamad Hussain, commodities economist at Capital Economics, told the Wall Street Journal. “The genie is out of the bottle given that the longstanding threat of Iran effectively closing the strait has now materialized.”
Many observers seem to believe that even when the war ends, one way or another, the oil landscape will change for good, with exporters investing in what the Wall Street Journal described as “an export network with multiple exits”—a real-life demonstration of the principle of distributing eggs to multiple baskets. As summed up by ADNOC’s head and the UAE’s energy minister, Sultan al-Jaber, “Energy security is no longer just about your ability to continue to produce. “It is about routes, access, storage and redundancy.”
Meanwhile, as warnings about a severe oil supply crunch multiply and get louder, some see relief on the horizon. Kpler, specifically, recently described a scenario in which Venezuelan, Iranian, and Russian oil all return to the market in greater volumes—which is already happening.
Venezuela, Kpler reported, is already producing and exporting 1.25 million barrels daily after the United States toppled the Maduro government and lifted sanctions so American companies could return to the country. This could rise to 1.5 million barrels daily by the end of the year, with Kpler analyst Naveen Das noting that since Venezuela is producing extra-heavy, high-sulfur crude, its recovering production would be in direct competition with Iranian and Russian heavy sour barrels, pressuring prices.
A forecast about weaker prices in less than a year has become an exception rather than the rule it was at the start of this year, before the war began, but it is a possibility. While there is no sign of any reconsideration of EU sanctions on Russian energy, the U.S. has issued waivers on crude and has extended these more than once, and this, per Kpler’s Das, “eliminated the psychological and compliance barriers for Asian buyers.”
As for Iran, the Kpler analysts see the chances of a peace deal rise in sync with the pressure on the U.S. economy resulting from the crisis-fueled energy price inflation. Essentially, the argument appears to be that the U.S. administration would have to do something to reverse the price trends, and that something will very likely involve sanction relief on Iranian crude. Again, it is worth noting this is still a distant prospect as President Trump appears intent on staying the current course.
By Irina Slav for Oilprice.com
