Oil prices ended the week at their highest level in almost six months, as renewed attacks on Saudi Arabia and fears of further escalation in the Gulf pushed Brent towards $120 per barrel. Brent settled at $116.72 on Friday, gaining 6.2% over the week, while WTI reached $103.27.
The rally comes despite signs that some Middle Eastern crude supplies are becoming more readily available. This has created an unusual situation: futures prices are rising sharply on fears of disruption, while some physical cargoes are trading at increasingly large discounts.
Benchmark snapshot
- Brent: $116.72/bbl (+6.2% WoW)
- WTI: $103.27/bbl (+4.3% WoW, December contract)
- Dubai: $111.68/bbl (+2.0% WoW, Platts futures)
- Oman: $116.77/bbl (December futures)
The latest escalation followed a series of Houthi attacks across Saudi Arabia, including strikes targeting energy infrastructure. On Thursday, Saudi Aramco ordered the evacuation of its headquarters in Dhahran, underlining how the conflict is increasingly threatening facilities central to global oil supplies.
Meanwhile, an oil spill from a tanker off the UAE coast added to concerns about maritime safety, although its cause has not yet been established. These developments have raised the risk of further disruption around the Strait of Hormuz and alternative export routes through the Red Sea.
However, the distinction between threatened and actual supply losses remains important. Prices are increasingly reflecting what could happen if attacks intensify, rather than just the amount of oil currently unavailable.
One of the more interesting developments this week has been the divergence between futures prices and physical crude markets. According to reports on Middle Eastern crude trading, Iraq's Basrah Medium recently sold at a discount of approximately $10 per barrel to Dubai, compared with near parity a month earlier. The premium for Oman crude over Dubai has also weakened.
This suggests that while traders are paying more to protect themselves against possible supply disruptions, some refiners are finding more competitively priced cargoes. The recovery in Gulf exports, supported by offshore ship-to-ship transfers near Oman, is helping ease pressure on parts of the physical market.
Yet cheaper crude at the loading point does not necessarily mean cheaper delivered oil. Goldman Sachs estimates that average global crude freight costs have risen above $20 per barrel, compared with around $3 a year ago. War-risk premiums, longer shipping routes and the need for additional tanker transfers are all contributing to these costs. For refiners, particularly those dependent on long-distance imports, the additional freight expense can offset discounts on the crude itself.
The situation for refined products remains more difficult. On Friday, Reuters reported that a tanker carrying approximately 40,000 tonnes of Russian diesel was heading towards New York, following an agreement between Washington and Moscow aimed at easing fuel shortages. The vessel, Agioi Fanendes, loaded at Russia's Baltic port of Primorsk on 22 October and is expected to arrive on 7 November.
The shipment illustrates how high energy prices are forcing changes in trade policy, particularly ahead of the US midterm elections on 3 November. However, additional Russian diesel is unlikely to resolve the wider shortage quickly. As the IEA's October report highlighted, global diesel exports in September were around 700,000 barrels per day below their level a year earlier, reflecting substantial losses from Russia and the Middle East.
Elsewhere, US inventories offered further support to prices. EIA data released on Wednesday showed commercial crude stocks declining by approximately 3.1 million barrels to 412.5 million, following an even larger draw the previous week. Gasoline stocks also fell by 3 million barrels, while distillate inventories rose by 1.7 million barrels but remained below their five-year seasonal average.
The macroeconomic consequences are becoming harder to ignore. US annual inflation reached 3.7% in September, with a 9.1% monthly rise in gasoline prices accounting for more than half of that month's overall CPI increase. Higher energy costs are therefore feeding directly into consumer prices at a time when economic activity is already facing pressure.
This creates a difficult situation for the Federal Reserve. Higher oil prices can push inflation upwards while simultaneously reducing households' purchasing power and raising costs for businesses. The question is whether these inflationary pressures prove temporary or begin to affect broader price and wage expectations.
What matters next
Federal Reserve (27–28 October) -The Fed meets on Tuesday and Wednesday, with its interest rate decision due at 6 pm UK time on 28 October. With inflation already at 3.7%, attention will be on whether policymakers see higher energy prices as a temporary shock or a more persistent inflation risk. September PCE inflation and the advance estimate of third-quarter US GDP are scheduled for Thursday 29 October at 12:30 pm UK time. Together, these will help indicate whether the economy is absorbing higher energy costs or beginning to slow more sharply.
US oil inventories (28 October) - The EIA's next weekly petroleum report is due on Wednesday at 2:30 pm UK time. After three consecutive weekly crude inventory declines, another draw would suggest stocks remain under pressure. Gasoline and distillate inventories will also be important, particularly with distillate stocks already 9% below their five-year seasonal average ahead of winter.
OPEC+ meeting (1 November) - Seven OPEC+ producers, including Saudi Arabia and Russia, are scheduled to review production policy next Sunday. The group previously agreed to maintain September production targets through November. With Brent approaching $120, traders will be watching for any adjustment to December output. However, even if producers signal higher production, shipping constraints and the security situation could limit how quickly those additional barrels reach consumers.
Middle Eastern exports and freight - Following the attacks on Saudi infrastructure and shipping incidents near the UAE, the focus will be on whether exports continue recovering or suffer renewed disruption. With particular attention on Saudi Arabia's East-West Pipeline, which allows crude to reach the Red Sea without passing through Hormuz, and the security of shipments leaving Yanbu. Movements in Basrah crude discounts, Oman premiums and tanker freight rates should also help establish whether the futures rally is beginning to reflect tighter physical supply.
Russian diesel (7 November) -The Agioi Fanendes is expected to reach New York with its 40,000-tonne cargo shortly after the US midterm elections. Whether it arrives as scheduled, and whether further Russian shipments follow, will provide an early indication of how much the US-Russia agreement can relieve pressure on fuel markets.
The bigger picture
In last week's OilSight, I said that the difficulty was increasingly about moving oil and refined products to where they were needed, rather than production alone. This week's developments add another dimension: financial markets are pricing the possibility of further disruption even as some physical supplies recover.
For now, Brent's approach towards $120 reflects a market highly sensitive to geopolitical developments and long term expectations. But with some physical crude becoming cheaper relative to benchmarks and high energy costs weighing on the wider economy, the strength of the rally may increasingly depend on whether further supply disruptions actually materialise.