October Is Beginning to Look a lot Like April for Oil
by Andreas Exarheas | Rigzone Staff
click here to read this article at Rigzone.com
*this article was not written by Roseland Oil & Gas
October is beginning to look a lot like April for the oil market, analysts at J.P. Morgan said.
October is beginning to look a lot like April for the oil market.
That’s what analysts at J.P. Morgan, including J.P. Morgan’s Head of Global Commodities Strategy Natasha Kaneva, said in a J.P. Morgan report sent to Rigzone by Kaneva on Friday.
“Delivered crude prices have returned to their spring highs, refinery margins are once again turning negative in Europe, and the risk of refinery run cuts is rising,” the J.P. Morgan analysts said in the report.
They highlighted, however, that the forces driving the market are fundamentally different.
“In April, the problem was a shortage of crude. In October, it is the cost of moving it,” they pointed out.
The analysts stated in the report that the “latest dislocation” began last month, “when Middle Eastern producers began moving more oil through the Strait of Hormuz”.
“Flows jumped from around 7.5 million barrels per day in July and August to 12 million barrels per day in September, drawing an increasing number of tankers into the region,” they pointed out.
“By September, 766 of the global fleet of 923 very large crude carriers (VLCCs) were in active use, leaving remarkably little spare capacity to absorb additional demand, particularly as 124 vessels within that fleet were effectively unavailable due to the U.S. blockade of Iranian oil,” they added.
The analysts warned that the problem is not simply how many tankers are available but how efficiently they can be used.
“More vessels are now tied up in ship-to-ship transfers, which can take up to 10 days, while others are taking longer routes to avoid higher-risk areas,” they said.
“Both extend voyage times, reducing the number of trips each tanker can complete,” they added.
“The arithmetic is straightforward: the longer each vessel spends moving cargo, the more vessels are needed to transport the same amount of oil,” they continued.
Sanctions
Sanctions add another layer of complexity, according to the J.P. Morgan analysts, who highlighted that around 124 Iranian VLCCs, which they pointed out is equivalent to roughly 13 percent of the global fleet, “remain effectively unavailable to much of the international market because of U.S. sanctions”.
“Many are anchored or drifting in the Gulf or offshore locations near Sri Lanka and Malaysia, their physical presence offering little relief to the mainstream tanker market,” the analysts said.
“The result is a sharp increase in the number of vessels required to move essentially the same amount of crude,” they added.
“Compared with the 2025 average, transporting Middle Eastern crude (excluding Iran) now requires an additional 35 VLCCs, 13 Suezmaxes, and 10 Aframaxes,” they continued.
“As the Middle East absorbs a growing share of the available fleet, other regions are left competing for increasingly scarce transportation capacity. In the rest of the world, for example, VLCC employment has fallen by 16 vessels,” they noted.
The J.P. Morgan analysts said Atlantic Basin producers are responding by moving crude on smaller vessels.
“A single VLCC cargo can be replaced by roughly two Suezmaxes or three Aframaxes, spreading the shortage across the tanker market,” they revealed.
“Outside the Middle East, Aframax employment has risen by 141 vessels, up 23 percent relative to the 2025 average, while Suezmax employment has increased by 52 vessels, an 11 percent gain,” they added.
Broader Tightening
The analysts went on to note that what began as a shortage of VLCC capacity in the Middle East has become a much broader tightening across the global tanker fleet. They added that freight rates have responded accordingly.
“Rates on key Middle Eastern crude routes and Atlantic deliveries doubled in September from levels that were already near all-time highs, even before the latest surge,” they said.
“The cost of shipping a VLCC cargo from the Middle East to China has surged to around $35 per barrel, compared with just $3 per barrel in early 2026. Freight from the U.S. Gulf Coast to China has reached $41 per barrel, up from $6 per barrel before the war,” they added.
“In effect, buyers are now paying upwards of $30 per barrel simply to transport crude to its destination – an unusually large component of the delivered price, on top of already elevated crude costs,” they highlighted.
The impact on delivered prices is striking, the analysts stated.
“For a buyer in China, the all in cost of a Middle Eastern barrel now stands at around $143 per barrel, compared with $126 per barrel for Brazilian crude and $131 per barrel for U.S. Gulf Coast supplies,” they pointed out.
“These are levels last seen in early April, but the forces driving them are fundamentally different,” they said.
“Back then, Middle Eastern oil flows had collapsed to just nine million barrels per day, from 23 million barrels per day in 2025, and a physical shortage of crude was driving prices higher,” they added.
“Today, with regional flows largely restored, the pressure is coming increasingly from transportation rather than the underlying availability of oil. In April, the market was paying a premium for scarce barrels. Today, it is paying a premium to move them,” they warned.
The analysts went on to highlight that there is a limit to how high freight rates can rise, noting that this limit is ultimately determined by refining economics.
“Refiners can absorb higher transportation costs only as long as the margins earned from converting crude into refined products justify the expense,” they said,
“Record-high product cracks have so far provided an unusually large cushion, allowing tanker freight rates to climb to levels that would previously have seemed difficult to sustain,” they added.
But that cushion is not unlimited, the analysts warned.
“If refining margins weaken, charterers’ willingness to pay for transportation could fall sharply, even when vessel availability remains tight,” they said, adding that there are signs that this threshold may have been reached last week.
“As in April, Northwest European hydro-skimming margins have fallen sharply … suggesting that refiners are once again struggling to pass rising crude acquisition costs through to product prices,” they said.
“This undermines the economics of processing imported crude and raises the risk of refinery run cuts, particularly at less complex facilities with limited flexibility to adjust their crude slate,” they added.
Lumpiness in Flows
In an oil and gas report sent to Rigzone by the Macquarie team on Friday, Macquarie strategists, including Macquarie Energy Strategist Walt Chancellor, stated that, recently, the pace of Hormuz transits had fallen from recent highs observed in late-September, which they pegged at around 14 to 15 million barrels per day.
The strategists noted, however, that “lumpiness in these flows is to be expected”, and pointed out that the late-September surge “was in part driven by extraordinary Saudi volumes”.
They went on to state that, in contrast, Red Sea volumes “have continued at a healthy pace following the restart of the East-West pipeline”.
“In total, across the last two weeks, broader Middle East exports appear to have exceeded the ~14-15 million barrel per day target we have envisioned as necessary to restore balance to the global oil market,” they said.
“Not yet time to fly the ‘Mission Accomplished’ banner, but we do believe this is a notable development,” they pointed out.
The strategists stated in the report that, at present, they see the flows “constituted of ~8-9 million barrels per day through the Strait, ~3 million barrels per day from the Red Sea, and over 2 million barrels per day from Fujairah”.
“Again, volatile and murky, but a level that we think may be sufficient to significantly diminish global inventory draws,” they added.
“Notably, within the Strait, we have seen a recent surge in successful attacks on tankers. Although we do not dismiss these events or associated risks of escalation, we continue to think a degree of de-sensitization to kinetics in the Strait may be merited,” they continued.
Downstream Capacity
The Macquarie strategists outlined in the report that, throughout the U.S.-Iran conflict, “constrained refining capacity has been a key factor keeping refined product markets tight”.
“Unplanned outages across Asia, the Middle East, and Russia have limited the availability of gasoline, diesel, and jet fuel, even as crude supply disruptions began to ease,” they said.
“The resulting tightness has highlighted the vulnerability of countries that rely heavily on imports to satisfy domestic fuel demand due to insufficient refining capacity,” they added.
“More broadly, the conflict has reinforced that energy security extends beyond access to crude oil and encompasses the ability to reliably produce or secure refined products during periods of market disruption,” they continued.
The strategists went on to state that, as a result, there has been a renewed focus on downstream investment and energy security.
“The G7 issued a joint communication highlighting the need to maximize refinery utilization rates, coordinate maintenance schedules, and improve refined product supply availability,” the strategists pointed out.
“The group also encouraged countries with spare refining capacity to increase production to help alleviate product market tightness,” they added.
“These measures accompanied the announcement of a 100 million barrel strategic stock release over the following four months, including a front-loaded release of diesel inventories during the initial phase of the program,” the strategists highlighted.
The strategists noted in the report that, beyond these short-term measures, governments and industry participants have increasingly focused on expanding refining capacity.
“Countries such as Australia, which relies on imports for approximately 90 percent of its refined product demand, have reopened discussions about increasing domestic refining capability and fuel supply security,” they said.
“Elsewhere, major refining projects continue to be announced and advanced including the 700,000 barrel per day Lamu Refinery in Kenya and plans to expand Nigeria’s Dangote Refinery by a further 700,000 barrels per day,” they added.
“In the United States, policymakers and industry participants have also revisited the possibility of restoring idled refining capacity,” they revealed.
“Sustained refining margins, elevated product prices, and ongoing geopolitical uncertainty have strengthened both the economic and strategic rationale for additional downstream investment,” they continued.
by Andreas Exarheas | Rigzone Staff
click here to read this article at Rigzone.com
*this article was not written by Roseland Oil & Gas