Middle East crude oil exports are recovering, yet for Asian refiners this recovery looks more like an illusion. Record freight and insurance costs are squeezing Asian refining margins down to near zero, and to keep buyer demand alive, Middle Eastern producers are being forced to sell crude at discounts of up to US$30 per barrel. The cost of trading price for volume is eroding their already stretched revenues.
According to a Reuters report on October 19, Middle East crude export volumes rebounded significantly over the past six weeks, with total September exports rising to 15.4 million barrels per day, close to ninety percent of pre-war levels. Asian crude imports also recovered, expected to reach 23.5 million barrels per day in October, the highest level since February this year. However, the rebound in crude supply has not translated into improved refining profits — according to traders, net profits at some Asian refiners are hovering near zero.
The core of the problem lies in the sharp surge in transportation costs. According to HiLo Analytics data, Asian refining gross margins in October averaged about US$40 per barrel, but after deducting average freight costs of roughly US$33 per barrel, net profit was only just over US$7. Freight has consumed 82% of Asian refiners' gross margins, while for refiners along the U.S. Gulf Coast and in Northwest Europe the same ratio is only about 16%. Meanwhile, Iranian attacks on tankers transiting the Strait of Hormuz have further escalated over the past two weeks, reaching the highest weekly record since the conflict erupted, making it difficult for freight pressure to ease in the short term.
Export Data Warms Up, but Recovery Quality Remains Questionable
According to the report, Kpler data shows that total Middle East crude exports in September (including cargoes routed around the Hormuz route) rose to 15.4 million barrels per day, about 90% of pre-war levels. Of this, flows through the Strait of Hormuz, under U.S. Navy escort, recovered to 10.7 million barrels per day, roughly three-quarters of pre-war levels.
On the Asian side, October crude imports are expected to reach 23.5 million barrels per day, slightly above the 2025 average, with cargoes from the Middle East accounting for about 10 million barrels per day. Numerically speaking, the supply-side repair has already begun to take shape.
However, according to Reuters, the recovery in crude supply has not driven a simultaneous improvement in Asian refining profits, with net profits at some refiners already near zero. This divergence reveals a deep structural distortion in the current energy crisis — the problem has shifted from crude oil shortage to refined product shortage, and the abnormal surge in logistics costs is cutting off the transmission chain from supply recovery to profit improvement.
Freight Erodes Profits, Asian Refiners Hit Hardest
According to the report, in a normal market environment, freight and insurance typically account for only 3% to 7% of the landed cost of crude. That ratio is now unrecognizable.
Iran's sustained attacks on tankers transiting Hormuz have not only pushed up freight rates and insurance premiums, but also forced traders and producers to build complex relay transportation systems — deploying large numbers of tankers for ship-to-ship transfers outside the Persian Gulf. This system heavily occupies global available tanker capacity, in turn driving up global freight rates far beyond the Middle East.
According to LSEG data, shipping a 2-million-barrel cargo from Nigeria to Singapore currently costs about US$32 per barrel, roughly eight times pre-war levels. According to ROI estimates, for some refiners, freight and insurance combined can account for 30% of the landed cost of crude.
Asia's vulnerability is particularly pronounced. The region has historically sourced about 60% of its crude supply from the Middle East, and after the war broke out, many Asian refiners were forced to cut run rates and turn to the United States, South America and other regions for alternative supply, sharply increasing transportation costs. By contrast, U.S. and European refiners have benefited from geographic advantages, with margins last month reaching historic highs.
Producers Trade Price for Volume, Revenue Losses Unsustainable
The report points out that faced with wait-and-see sentiment from Asian buyers, Middle Eastern producers have sharply lowered official selling prices, with some sellers reportedly offering discounts of up to US$30 per barrel to compensate buyers for the high logistics costs they bear.
This strategy reflects the current dilemma facing Gulf producers: on one hand, they need to maximize export volumes to rebuild fiscal revenue damaged during the war; on the other hand, widening discounts are eroding the actual return per barrel of crude. If the conflict continues, discounts may widen further, adding to the revenue pressure on producers.
According to Reuters, in the face of narrowing profits, measures Asian refiners can take include: reducing overall run rates, concentrating production on high-margin refined products such as diesel, or drawing down domestic inventories to replace imports. Any of these choices will directly compress import demand for Middle East crude, rendering the Gulf producers' export recovery efforts futile.
Crack Spreads Under Pressure, Refined Product Market Structurally Tight
According to the report, the other side of the current energy crisis is a structural shortage in the global refined product market. According to International Energy Agency data, global refinery throughput this year is expected to fall by 2.3 million barrels per day to 81.7 million barrels.
The Middle East conflict has lasted eight months, with multiple refineries damaged in the fighting; Ukraine's strikes on Russian refining facilities have further intensified the supply tightening. The diesel market has been hit most noticeably, with prices once hitting a record high last month.
The dual pressure of widening discounts and high freight rates is reshaping the global crude pricing landscape. The sharp discount of Middle East crude relative to benchmark prices, on one hand, lowers the reference value of regional crude benchmarks; on the other hand, high freight costs raise Asia's landed costs, greatly narrowing the actual profit space of refined product crack spreads and continuously dampening refiners' willingness to operate.
Iranian Attacks Escalate, Risk Premium Difficult to Fade
There is little sign of relief in freight pressure in the short term. According to Reuters, Iranian attacks on tankers transiting the Strait of Hormuz have clearly escalated over the past two weeks, with weekly attack counts rising to the highest level since the conflict erupted.
The rising frequency of attacks means the war risk premium will continue to be embedded in freight and insurance costs, making it difficult to reverse the elevated state of logistics costs. For Asian refiners, even if Middle East crude supply recovers further, as long as freight rates remain high, the room for profit improvement will remain extremely limited.
For Gulf producers, if the transportation cost per barrel of crude continues to climb while buyers simultaneously demand larger discounts, the current rebound in export volumes may prove unsustainable. As Reuters noted in the article, this recovery may ultimately be nothing more than a mirage.
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