There is no ‘normal’ for the oil markets to return to

Analysts and traders are still, for the most part, awaiting a return to normal that will not materialise. By Orkhan Rustamov. 

In the last six months, the Brent Crude price has fluctuated more wildly than any other time since Covid. The market has seen prices range from around $60 to nearly double that, and virtually every number in-between. This represents a major dose of volatility into what has otherwise been a calm oil market, at least in recent times. The ongoing rounds of violent exchanges in the Gulf demonstrates that a swift return to calm stability is little more than a fantasy. 

Taking a long-term view, oil has obviously experienced several, significant spikes and collapses in price. The onset of Covid in 2020 triggered one of the fastest and biggest falls in the value of Brent Crude in a generation. Only two years later, the war in Ukraine surged prices in the opposite direction, reaching $133 a barrel in the immediate aftermath. 

However, despite the characterisation of oil as an especially volatile product, much of the time the price is spent hovering between $50 – $80 a barrel. This has, historically, provided a measure of certainty and stability with spikes/collapses proving the often-short-lived exception rather than the norm. Most analysts and traders, looking at longer time horizons, would consider this the standard baseline from which they operate. 

Events in the Gulf have sent a shockwave through that assumption. The past six months of conflict have struck at the very heart of global oil production, refinement and export. Despite being a region frequently hit by conflict, rarely have we seen such an all-encompassing hit on all parts of the centre of the oil world.  

June’s Memorandum of Understanding offered hope that a steady return to oil price normality could be achieved. Prices came down and Gulf production ramped up once again. However, recent escalations in rhetoric and on-the-ground violence have dwindled traffic through Hormuz back to minimal levels. Across July, shipping was down as much as 90% on pre-conflict levels, averaging between 8-15 ships per day in recent weeks. 

No doubt, at some point, tensions will again simmer down and some calm will be restored. However, it is increasingly clear that the security and stability the Gulf depends on, indeed the world depends on, for oil price ‘normality’ has been shattered. Nations and companies overseeing the world’s most expensive and sophisticated oil and gas producing infrastructure now find themselves at the mercy of events and personalities beyond their control. 

There has been some recognition of this new reality in the region. The UAE intends to accelerate construction of the Habshan-Fujairah pipeline, its second East-West pipeline, now due for completion in 2027. This will allow it to bypass the Straits with 3.6bn BPD of capacity. DP World also plans to add two new container terminals to Fujairah port as another bypass measure. 

Elsewhere, the Iraq Development Road project, which connects Basra’s Grand Faw Port to Turkey, will see a 1,200km high-speed rail and road corridor opening up in the Northern Gulf, allowing oil to bypass Hormuz and the Suez Canal on its way to Europe. Other, similar pipeline, rail and road projects have gathered renewed interest and momentum since the conflict began.

However, none of this will have an immediate impact. If anything, these projects emphasise that normal will not be returning in the short-term. They highlight how the world’s biggest oil producers, those dependent on the smooth production and transport of black gold for their nation’s economic wellbeing, recognise the long-term consequences and reverberations of what may still feel like a short-term, somewhat contained conflict.

What does this mean for those of us trading and transporting oil day-to-day? Simply, that we must accept and adapt to this new reality. The Gulf producers and exporters already recognise that we are in a new world where a calm, secure Straits of Hormuz can no longer be relied upon, even in the calmer times. It is now for the traders, analysts and operators in the global oil market to recognise the same and accept that we are not ‘returning to normal’ anytime soon. 

Orkhan Rustamov is the Chief Executive Officer of Alkagesta