The Barrel's Route

The conclusion first: crude rose sharply twice this year, and both times the market priced the increase as temporary. Front-month Brent was USD 72.48 on 2/27, the last trading day before the war. It reached the year's high, USD 118.35, on 3/31. By 7/1, USD 71.57 brought it back to prewar levels. It rose again to USD 108.75 on 9/15, closing 9/25 at USD 104.32 (Yahoo continuous front month).

High at the front, low at the back. Arrange Brent futures traded on 9/25 by delivery date: this November was USD 104.32, next December USD 80.11 and December 2028 USD 74.45. Crude received now cost about USD 30 more than crude delivered over 2 years later. Before the war, on 2025-12-31, the curve was flat: the nearest contract was USD 60.85 and December 2028 USD 62.90.

This shape expresses a belief in temporary disruption. The market agrees crude is scarce now, but does not expect scarcity 2 years later. Most companies below acted along this curve (our interpretation). The far end moved too: December 2028 rose USD 11.55, from USD 62.90 at the start of the year to USD 74.45. Much less than the front month's +USD 43.47, but not 0.

It fell 2.14% on 9/25. That day, reports said Iran's foreign minister proposed in New York to open the strait within 7 days if the US lifts the blockade and sanctions and stops fighting across all fronts★ (Al Jazeera·Euronews). The US has not accepted. On 9/24, 13 vessels crossed Hormuz★ (preliminary Kpler count, cited by The National).

For producers inside the strait, the first shortage was routes, not crude. Aramco can keep extracting up to 12 million barrels/day★ (reported management comments). Yet Saudi crude production in August was 6.24 million barrels/day, the lowest since 1990★ (Reports citing OPEC secondary sources). Including gas, Aramco's Q2 production was 9.5 million barrels of oil equivalent/day, down 25% from Q1's 12.61 million (Aramco release).

So it opened another route. The East–West Pipeline crosses Saudi Arabia to Yanbu on the Red Sea. Aramco filled it to 7 million barrels/day in March★ (confirmation reported 3/28). Normal Yanbu exports were just 760 thousand barrels/day★; loadings rose to 4.76 million in June★ (Kpler).

That route was blocked in turn. An early-April attack damaged pumping stations; capacity returned to 7 million barrels/day on 4/12 (Saudi Press Agency). After Yemen's Houthis imposed their Saudi port blockade on 7/20, Yanbu loadings fell from 4.23 million to 2.4–3.0 million barrels/day★. Drone attacks on pumping stations stopped the pipeline on 9/10–11★. It restarted at low flow on 9/22★, targeting about 4 million barrels/day; full restoration was forecast to take 6–8 weeks★.

With that route blocked, it tried the old route again. Aramco increased Gulf loadings to 3.7 million barrels/day after 9/12★ (Vortexa). It sold about 60 million barrels in September–October by loading in the Gulf and transferring cargoes to other vessels off Oman★.

When volumes fall short, prices and allocation select customers. Aramco's official selling price (OSP) for Arab Light to Asia is a premium over Dubai. The premium rose from USD 0.30 in February to a record USD 19.50 in May★. In August, a USD 1.50 discount cut it by USD 11 in one month★. October allocations to European term customers were 0, redirected to China, Korea, India and Japan★. Nearby customers came first (our interpretation).

Profits held up; cash fell short. Aramco's realized Q2 oil price was USD 108.1/barrel, 41% above Q1's USD 76.9. Higher prices offset lower volumes: adjusted net income of USD 33.4 billion was nearly unchanged from Q1's USD 33.6 billion. Free cash flow of USD 12.3 billion, however, fell short of the USD 21.9 billion quarterly base dividend. The debt ratio rose from 4.8% to 6.2% (Aramco release).

Outside producers received higher prices, then put the money into debt and dividends before extra production. Occidental (OXY) produces 86% in the US. Its realized Q2 oil price of USD 96.78/barrel was up 38% from Q1 (SEC filing). It lost some Gulf output. Attacks including the 3/16 drone strike on the UAE's Shah gas field left overseas production 12% below the 2025 average, a loss of about 2% of total output.

OXY had already given away part of the upside. It capped prices on 100 thousand barrels/day at USD 75.89/barrel in contracts signed 2–4 weeks before the war. We estimate this takes about 10% of this year's extra pretax cash from higher prices (our approximation). It made no more such contracts afterward (Q1 call).

The earnings went toward debt. OXY's debt principal fell from USD 15 billion in February to USD 11.8 billion at end-June. Its capex plan of USD 5.5–5.9 billion stayed unchanged. First-half share buybacks were just USD 117 million. Management deferred reinvestment until “the macro environment is clearer” (translated; Q1 call).

Petrobras gained volume too. Q2 production hit a record 3.34 million barrels of oil equivalent/day. Crude export destinations shifted: China's share fell from 62% in Q1 to 35% in Q2; India's rose to 22%. Oman's state-owned OQ Trading was among five new customers. A company from a Gulf producer was buying Brazilian crude (SEC filing).

The state took part of the windfall. On 3/12, Brazil imposed new export taxes of 12% on crude and 50% on diesel. Petrobras's first-half export taxes were USD 1.087 billion, including USD 579 million unpaid at 6/30. Domestic diesel prices were held down, but government subsidies covered much of the cost rather than the company (our interpretation). Petrobras received BRL 9.9 billion in subsidies through 9/19. Following its 45%-of-free-cash-flow rule, Q2 dividends rose to BRL 17.4 billion (SEC filing).

The market expects these profits to shrink next year. Analysts expect EPS to fall from 2026 to 2027 by 32% for OXY and 29% for Petrobras (Zacks; 1–11 estimators). Among seven US producers compared that day, only APA (−30%) was similar; ExxonMobil was −1%. The futures curve's shape carried straight into earnings estimates (our interpretation).

Higher oil prices did not increase calls for drilling rigs. Borr Drilling rents 29 mobile shallow-water rigs, or jackups, to producers by the day. Global jackup utilization actually slipped from 88.0% in December to 87.4% in June (S&P Petrodata, cited by the company). It said oil prices take 6–12 months to reach drilling contracts (May call★).

The initial shock hurt instead. In March, all personnel evacuated 4 Borr rigs in Saudi Arabia, the UAE and Qatar. Insurance and fuel costs rose; tenders were delayed. The Gulf accounts for about 36% of global jackup supply★ (Westwood). Operating earnings before interest and depreciation halved from USD 88.5 million in Q1 to USD 43.8 million in Q2. War-related insurance/fuel added USD 7.3 million in costs; new-rig preparation (USD 22.5 million) and bad debt (USD 10.8 million) were larger (SEC filing).

Borr bought time to wait for the boom. In May–June, it refinanced debt due in 2028 and 2030 with USD 2.035 billion of new bonds due in 2032 and 2034, at 8.75–9.00%. Its stock rose from USD 4.03 at the year's start to USD 6.61 on 5/18, then returned to USD 4.20 on 9/25, up 4.2% year to date.

Valaris took a different route. Drillships working in waters thousands of meters deep provide more than half of Valaris's revenue. Multiyear contracts cushioned the Gulf shock (our interpretation). The Middle East still reduced first-half operating profit by about USD 38 million (SEC filing; the war-insurance/shipyard-delay breakdown is a secondary summary★). Its stock rose 60.7% from the year's start. Most of its outperformance over Transocean (+30.3%) came from the 34.3% jump on the 2/9 merger-announcement day.

Producers were in no hurry either. Aramco suspended 22 jackups when it abandoned its expansion plan in 2024, then stopped again this March because of the war★. Saudi drillers only restarted all suspended rigs in August★. With the curve pricing crude over 2 years out about USD 30 lower, there is little reason to rush new wells (our interpretation).

Distance and risk, rather than cargo volume, set freight rates. In early May, very large crude carriers (VLCCs) carried 14.4 million barrels/day, 36% below the prewar 22.5 million★ (Vortexa). Yet west-to-east crude volume multiplied by voyage distance rose 9% versus 2025★. US/Brazilian crude replaced Gulf crude in Asia. About 57 VLCCs were trapped inside the Gulf in early May★.

So vessels ran short. Frontline's realized daily VLCC rate doubled from USD 74,200 in last year's Q4 to USD 152,700 in this year's Q2. Cash needed to run a vessel was USD 23,800/day. It had already booked 86% of Q3 volume at USD 156,900/day. Q2 net income of USD 659 million was a company record (SEC 6-K).

The market index rose more, but we do not take it at face value. The Middle East–China VLCC freight index reached a record USD 1,212,503/day on 9/18 (Baltic Exchange). With few actual trades on that route, it is effectively closer to a quote★. War-risk insurance for Gulf voyages rose from 0.1–0.25% of vessel value in normal times to 7.5–12.5% in early September★.

Shipowners also bet on temporary disruption. Frontline avoided the Gulf★ (management). Instead, it sold 2 VLCCs built in 2017 for USD 270 million. Multiyear charters signed in July pay USD 90 thousand/day for 2 years and USD 75 thousand/day for 3 years, 59% and 49% of Q2 realized rates (SEC 6-K). Global VLCC orders accumulated to 33.5% of the fleet★. Vessels ordered at high prices pressure rates 2–3 years later (our interpretation).

Diesel was scarcer than crude, and refiners captured the difference. Product prices minus crude prices form the refining margin, or crack. The US Gulf diesel crack was USD 43.52/barrel in Q2, about three times the USD 14.79 1 year earlier (Valero filing). Valero's Q2 net income of USD 3.72 billion, USD 12.62/share, was a company record.

Crude returned to its starting point; diesel did not. A crack calculated from New York diesel futures was USD 28/barrel at the year's start. It was still USD 64 on 7/1, when Brent returned to its prewar USD 71.57. It reached USD 115 on 9/16 and USD 92 on 9/25 (our approximation).

There is a reason products became scarcer than crude. Valero management said, “not weaker demand, but insufficient supply” (translated; Q1 call★). Gulf export refineries were attacked and shipping blocked, making products scarcer than crude (our interpretation). US Q2 diesel exports of 1.56 million barrels/day were 30% above the 5-year average (EIA).

It replaced feedstock cheaply. US Persian Gulf crude imports fell from 646 thousand barrels/day in January to 113 thousand in June. Venezuelan imports rose from 200 thousand to 630 thousand over the same period (EIA). Valero filled the gap with strategic reserves and heavy crude from Canada/Venezuela (call★). Q2 Canadian heavy crude delivered to Houston was USD 13.92/barrel below Brent (Valero filing).

Exporters face policy risk too. On 9/23, reports said a 90-day diesel-export ban was being considered; the White House denied it. Reports put Valero down 2.1% intraday★; it closed down 0.3% (Yahoo). US weekly retail diesel reached a record USD 6.529/gallon in the week of 9/21 (EIA). Rising domestic prices increase pressure to block exports (our interpretation).

For import-country refiners, feedstock and rules mattered more than profits in this shock. S-OIL normally sources about 90% of crude from Saudi Arabia★; Aramco is also its controlling shareholder, with 63.4%. In March, Aramco sent S-OIL 6 VLCCs carrying 12 million barrels from Yanbu★, the first private crude reaching Korea by the detour★.

S-OIL went looking for crude. The company said the Red Sea blockage on 7/20 sent crude around Suez, arriving about 30 days later★. September cargoes would be collected at an Egyptian Mediterranean port★. When the pipeline stopped on 9/10, it sent 2 VLCCs for transshipment at an Indian port★. It also borrowed government reserves, to return an equal volume later★.

The government capped selling prices. From 3/13, the government capped refinery selling prices. Diesel began at KRW 1,713/liter (Korea Policy Briefing), changed to KRW 1,923 on 3/27 and KRW 1,773 on 6/26, then stayed frozen★. Gasoline/diesel/kerosene exports were capped at the previous year's same-month volumes★.

Loss compensation is still pending. The government promised to compensate losses at cost plus a reasonable margin★. Yet the first payment, covering 3/13–6/30, was unpaid as of 9/19★, with payment expected in late November–year-end★. S-OIL called the losses substantial without an amount.

Margins were records nonetheless. S-OIL's Q2 diesel margin was USD 62.7/barrel, four times the USD 15.8 of 1 year earlier. Its lube-base-oil margin was USD 139.7, and lubricants operating profit reached a record KRW 477.4 billion. Yet the refinery ran less. Crude-distillation utilization fell from 96% in 2025 to 76% in the Q2 (company release). Scheduled maintenance (company statement) coincided with crude-supply uncertainty (secondary reports★).

Half of Q1 profit came from inventories. Selling cheaply purchased crude at higher prices creates an accounting gain (inventory valuation gains). This accounted for KRW 643.4 billion (52%) of Q1 operating profit of KRW 1.2311 trillion. As Dubai crude fell from USD 128.5 in March to USD 79.5 in June, inventory-related gains shrank to KRW 113.7 billion in Q2. Q2 refining operating profit of KRW 532.4 billion was half Q1's KRW 1.039 trillion.

Korea as a whole is changing its crude-supply map, too. The Middle East supplied 62.3% of first-half crude imports, down from 68.7% 1 year earlier; in May–July, its share was 48.5%★. Pump gasoline peaked at KRW 2,011.9/liter on 5/11. In the fourth week of September, it was KRW 1,858.0, down for 19 straight weeks★ (reports citing Opinet). Fuel-tax cuts continue through 11/30★.

Putting the eight companies side by side reveals five patterns. All come from these seven months. Whether they hold for other shocks remains unknown.

First, routes close before production does. Aramco could pump more crude but had no way to ship it out. As alternative routes emerged, attacks moved there, too. Longer journeys left too few tankers. Importers' refineries received crude 30 days later.

Second, shortages intensify farther down the chain. Over 1 year (Q2 2025→Q2 2026), crude rose 1.5x (Brent on Petrobras' basis). Over the same period, US Gulf diesel cracks rose 2.9x and S-OIL's diesel margin 4.0x. Even on 7/1, when crude returned to prewar levels, diesel cracks (our approximation) were more than twice their start-of-year level. Refineries and vessels downstream of crude were blocked as well (our interpretation).

Third, the money earned was spent as though the shock were temporary. Producers repaid debt and paid dividends. Drilling orders did not rise. Shipowners sold old vessels at high prices and signed multiyear charters with rates declining each year. Analysts forecast next year's earnings at OXY and Petrobras roughly 30% below this year's. All point in the direction implied by the futures curve (our interpretation).

Share prices also differed at each link. From the start of the year through 9/25, Valero rose 137.8% and Frontline 118.7%, followed by S-OIL (+87.5%) and Petrobras (+71.9%). Valaris gained 60.7% (mostly merger terms), OXY 38.3%, Aramco 8.2% and Borr 4.2%. Brent rose 71.4% over the same period. Owners of bottlenecks (refining and transport) rose more than sellers of crude (our interpretation).

Fourth, governments enter the price tag. What differs is who pays first. Brazil's treasury paid subsidies first and recouped part of the windfall through export taxes. In Korea, refiners first absorb losses at capped prices, and the treasury compensates them later. The US released reserves and waived coastal-shipping restrictions. Even rumors of export restrictions moved prices.

Fifth, suppliers choose customers through prices and priority; buyers move to open routes. Aramco raised premiums and put distant Europe last. China bought less Brazilian crude, while India, Europe and Oman bought more. US refiners substituted Venezuelan crude for Gulf crude. Korea reduced its Middle East share.

The patterns in this report come from a single shock. We will revise our interpretation if any of the following is confirmed.

• It may not be temporary. The far end of the curve has also risen USD 11.55 since the start of the year. If prices 2 years out settle above USD 75 and Aramco jack-up tenders or contract renewals at its drilling joint ventures increase, the third pattern is wrong.
• If the strait reopens, the chain runs in reverse. Frontline management said loaded vessels and Gulf inventories would move first when the strait reopens★. Freight rates could then collapse first (our interpretation). This report examined only the closure. We have yet to observe the sequence during reopening.
• Governments may take a larger role. If the US actually bans diesel exports or Korea taxes windfall profits (a 20% proposal is pending★), the value of the bottleneck goes to the state rather than refiners. The second and fourth patterns change shape.
• Most figures are from the Q2. Q3 results arrive from late October. OXY's estimated Q3 EPS (USD 1.37) is 43% below the Q2's USD 2.40.
• These are the eight companies we selected. Including Chinese state-owned refiners or integrated producers such as ExxonMobil might tell a different story. Many figures for Saudi output, insurance, freight indices and Korean policies come from secondary reporting.

Publication-date values · ②③④⑦⑧ require human verification of events · No composite score

• Six items carried over from #22. Korea reopens 9/28; SoftBank bond payment 9/29; quarter-end funding plumbing 9/29–10/2; Micron results 9/30; OpenAI payment 10/1; Houthi assessment windows (10/1 and 10/3). Verification condition: After each deadline, score it exactly as originally defined. Carry the results into the next report.
• 9/28 (Mon): Korean markets reopen. Verification condition: How do refiners such as S-OIL respond to oil-price and interest-rate news over the holiday?
• The US response to Iran's 7-day proposal. Verification condition: Check announcements of an end to the blockade separately from actual increases in transit.
• Early October: Aramco's November OSP. Verification condition: The direction of premiums and whether European allocations resume.
• 10/4: Brazilian presidential election (runoff 10/25); 10/5: gasoline-tax cuts end★. Verification condition: Post-election announcements on fuel prices and subsidies.
• Around 10/10: OXY's Q3 preliminary disclosure (our estimate from the past two quarters' pattern). Verification condition: Realized prices and settlements of price-cap contracts.
• October: Korea's 11th price-cap adjustment and loss-compensation recommendations. Verification condition: Changes to the cap and timing of the first payment.
• 10/22: Valero Q3 results. Verification condition: Margins in the quarter when diesel cracks exceeded USD 100.
• Early November: Aramco, OXY, Petrobras and Borr Q3 results. Verification condition: Aramco's cash and dividends, Borr's profit recovery, and Petrobras' export-tax and subsidy receivables.
• Early to mid-November: expected full restoration of the East–West Pipeline (6–8 weeks from 9/22★). 11/30 Korean fuel-tax cuts end. Q4 Valaris–Transocean merger closes. Late November (unconfirmed) Frontline's realized Q3 freight rates.