Brent crude surged 3% to hit $112 a barrel on Thursday 22 October, its highest level since 18 May, after a drone strike on Saudi Aramco's Shaybah oil field and a series of Iranian attacks on tankers near the Strait of Hormuz intensified fears over global crude supply. Brent December futures were trading at $111.91 and WTI December futures at $99.30 in morning trading. The Shaybah strike, attributed to Houthis, killed two people but left operations unaffected at the field, which has a production capacity of 1 million barrels a day [Source: Bloomberg]. Houthis also struck a civilian airport in Dammam on Wednesday, killing at least one person.

Iran's IRGC said it struck four vessels in the northern Gulf, with three more hitting mines near the Strait of Hormuz. The US State Department ordered non-emergency government employees and their family members to leave Saudi Arabia in response to the growing threat. US equity futures came under pressure as escalating concern about the Middle East conflict pushed oil higher, spurring inflation fears with US midterm elections less than two weeks away. Treasuries also fell following the reports. The conflict has driven global shipping costs for oil to roughly sevenfold their pre-war levels, according to Goldman Sachs. Heidmar Maritime Holdings CEO Pankaj Khanna said freight costs have surged to 25-30% of oil's delivered cost from a historical 3-5%, with one US Gulf-to-China VLCC voyage recently fixed at $82 million [Source: Bloomberg]. US crude inventories fell by 8.557 million barrels in the week ending 9 October to 415.577 million barrels, according to Valdrans data from EIA figures released 14 October.

Despite the futures rally, a notable divergence has opened up between paper and physical markets. A key benchmark for Middle Eastern crude fell to its lowest in nearly three months, reflecting the resilience of the region's exports even as Iranian attacks on shipping intensify. Oil shipments from the Middle East are showing little sign of buckling in the face of more frequent attacks, and Bloomberg reported that flows remain near pre-war levels. The oil market is nonetheless fragmenting as ballooning freight rates disrupt the region-to-region flows that previously moved barrels to the most lucrative destinations. Indian Oil Corp plans to reduce the amount of crude purchased under term contracts with Middle Eastern producers next year as attacks in the Persian Gulf continue to threaten supply routes. Asian LNG prices also rose to their highest in almost four years as tanker strikes in the Middle East damped hopes for a recovery in exports from the region.

Brent has gained more than 80% this year as the US-Iran conflict, now nearing its ninth month, has repeatedly disrupted Persian Gulf supplies. Countries from Canada to Argentina have seen a surge in investment and production as buyers rush to replace supply lost to Hormuz disruption, tilting the balance of global oil power towards the Americas. Bank of America's Francisco Blanch warned that the crude oil market could face a crunch point in 'maybe four, five months' [Source: Bloomberg]. Saudi crude exports hit a five-month high as recently as August, and India's Middle East oil imports returned to pre-war levels in September, but Thursday's escalation has renewed doubts about the durability of those flows.

Sources: The Guardian, Bloomberg, Cornerstone Futures, Turkiye Today, The Wall Street Journal, The Statesman, Financial Times, Reuters, Valdrans Data