MIDDLE East oil producers have launched a battle to recapture market share lost during the Iran war, setting current and former Organisation of the Petroleum Exporting Countries (Opec) members on a collision course as traffic through the Strait of Hormuz gradually recovers.
Such turf battles usually send crude prices plummeting, yet consumers are unlikely to see much relief at the pump in the near term.
The Iran war, now in its eighth month, delivered the biggest shock to the global oil market in decades.
After Iran imposed a blockade on Hormuz — through which roughly a fifth of global oil supplies once flowed — Gulf producers, including Saudi Arabia, the United Arab Emirates (UAE), Kuwait and Iraq, were cut off from their most important export route.
While some quickly shifted volumes to alternative routes bypassing Hormuz, regional exports remained well below pre-war levels for months.
That is beginning to change: Crude exports through Hormuz have averaged 12 million barrels per day (bpd) over the past two weeks, around 80 per cent of pre-war levels, according to data analytics firm Kpler.
When combining Hormuz volumes with shipments through alternative routes, including Saudi Arabia's Red Sea terminals and the UAE's Fujairah export hub, Middle East crude exports exceeded the pre-war average of 18 million bpd for much of the week ending Oct 3, according to Kpler.
As a result, the global crude supply deficit is expected to narrow to just 250,000 bpd this month from almost four million bpd in May, according to consultancy Energy Aspects.
Hormuz remains far from safe, however. Iranian forces continue to target vessels moving through the strait, with nearly one tanker hit every day over the past two weeks.
But Gulf producers are increasingly willing to accept this risk, as well as the sky-high shipping and insurance costs, to maximise their exports and rebuild ties with customers forced to seek alternative suppliers during the disruption.
This has nevertheless kept benchmark Brent oil prices elevated at more than US$100 a barrel, around 40 per cent above pre-war levels.
It appears the first shot in the Middle East market share war has already been fired.
Oil market share battles in the Opec era have historically occurred following the discovery of new sources of supply, such as offshore drilling in the 1980s or the shale revolution in the 2010s.
In response to perceived threats to its market dominance, Opec has typically reacted by allowing low-cost producers to ramp up output in an attempt to squeeze rivals.
This time, however, the battle is undermining the group from within.
Opec, already reeling from the war early in the year, was dealt another heavy blow in May when the UAE withdrew from the group to pursue plans for a substantial increase in production capacity.
The move raised questions about whether the 66-year-old Saudi-led club could emerge from the conflict with its influence intact and reassert its ability to manage prices through coordinated supply control.
Combined crude production in Saudi Arabia, the UAE, Iraq and Kuwait is expected to average 17.3 million bpd this month, compared with about 21 million bpd in the six months before the war, according to Energy Aspects.
The recovery, however, is uneven.
Riyadh initially redirected large volumes of crude to its west coast port of Yanbu following the outbreak of the war, enabling exports to remain near 60 per cent of pre-war levels.
But attacks on the East-West pipeline last month, combined with a Houthi blockade of the Bab el-Mandeb Strait used for exports, disrupted that strategy and forced the kingdom to shift more exports back through Hormuz.
The move has proven successful. Production, however, remains significantly lower.
Saudi output is expected to average just 7.4 million bpd this month, roughly 75 per cent of pre-war levels.
The scramble to recover lost customers is becoming a defining feature of the post-blockade market.
Gulf producers are increasing exports while some producers have offered deep discounts to buyers willing to load cargoes inside the Gulf.
But will this result in dramatically lower prices at the pump?
Probably not as long as getting oil through Hormuz remains this risky, unpredictable and expensive.
The Middle East oil export recovery rests on fragile foundations, but Gulf producers appear willing to forge ahead with their own battle regardless.
* The writer is from Reuters
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