Oil retreats as Saudi Oman shipments ease fears

Oil prices fell on Wednesday after Saudi Arabia offered additional crude cargoes to Asian refiners through Oman, easing fears that Middle East disruptions would remove more barrels from the market.

Brent crude settled $2.92, or 2.7 per cent, lower at $105.83 a barrel, while US West Texas Intermediate dropped $3.40, or 3.2 per cent, to $102.43. The decline followed a rally driven by concern over damage to Saudi export infrastructure and reduced tanker traffic through the Strait of Hormuz.

Saudi Aramco has begun using ship-to-ship transfers near the Omani port of Sohar to maintain crude flows after attacks disrupted the kingdom’s East-West pipeline to Yanbu. The pipeline, which allows oil to reach the Red Sea without passing through Hormuz, has become more important as traffic through the strait has fallen sharply amid the widening regional conflict.

The additional Saudi supply offered through Oman gave traders some reassurance that alternative logistics could limit immediate losses, although the market remains sensitive to any further damage to pipelines, terminals or shipping routes. Vessel movements through Hormuz remained low, underlining the fragility of Gulf export flows despite the new Saudi arrangements.

US inventory data added to the downward pressure on crude. The Energy Information Administration said commercial crude stocks fell by 640,000 barrels last week, a smaller decline than traders had expected. Gasoline and distillate inventories rose, signalling that domestic product supplies had improved even as international fuel markets remained tight.

Diesel prices, however, stayed near record levels in Europe and the United States. Middle distillates have been squeezed by disrupted Middle Eastern supply, limits on Russian exports and damage to Russian refining capacity from Ukrainian attacks. The resulting shortage has pushed refining margins for diesel and jet fuel sharply higher even as crude prices eased.

US retail diesel prices have climbed to record territory, increasing costs for trucking, agriculture, construction and heating. The rise has intensified concern that expensive fuel could feed through to inflation, particularly as businesses face higher transport and distribution expenses.

European buyers remain exposed because the region depends heavily on imported diesel and jet fuel. Russia has extended restrictions on diesel exports through October, while uncertainty over Gulf shipments has forced refiners and traders to compete aggressively for available cargoes. That has kept product prices elevated despite Wednesday’s retreat in crude benchmarks.

The divergence between crude and diesel highlights the uneven impact of the supply shock. Extra Saudi crude can ease concern over feedstock availability for refiners, but it does not immediately replace lost refining capacity or restore disrupted flows of finished fuels. Product markets can remain tight even when benchmark crude prices fall.

Saudi export flexibility is being tested by security risks beyond Hormuz. The East-West pipeline and the Red Sea route through Yanbu were designed to reduce dependence on the Gulf shipping lane, but attacks on Saudi infrastructure and threats around the Bab al-Mandeb have narrowed the number of dependable alternatives.

Aramco has delayed or cancelled some deliveries to European customers after the pipeline disruption, increasing demand for competing grades from the Atlantic Basin. European refiners have sought alternatives, including North Sea crude, while Asian buyers have been offered additional Saudi volumes through Oman.

Oil markets are now also weighing a stronger dollar and higher borrowing costs after the US Federal Reserve raised interest rates. A firmer dollar can make commodities priced in the US currency more expensive for buyers using other currencies, adding pressure to crude during periods when supply fears ease.

Even after Wednesday’s fall, prices remain well above levels seen before the latest escalation in Middle East hostilities. Traders continue to attach a sizeable risk premium to crude because major export routes, production infrastructure and refining systems remain vulnerable to further attacks.