Energy: The Strait Paradox

“As is often the case, we navigate by starlight beneath a cloudy sky.”

The quote is by Jerome Powell*, but it could just as well describe the dangerous work of crews crossing the Strait of Hormuz with all transponders switched off to evade Iranian surveillance. Their courage has enabled a significant recovery in transit volumes and, consequently, in exports from Middle Eastern countries, as highlighted by several specialist consultancies. Despite this rebound in volumes, the price of Dated Brent, which reflects physical market transactions, remains close to its year-to-date high at $127/bbl, followed by paper-market crude** at $115/bbl. This apparent decoupling between volumes and prices naturally raises questions about the signals being sent by the oil market.

Market participants are probably keeping two factors in mind: physical supply risks and dwindling inventories, both of which are tending to worsen. Despite the US president’s de-escalation strategy ahead of the midterm elections, the reality on the ground tells a different story. According to the UKMTO***, October has seen an unprecedented number of skirmishes since the conflict began, averaging more than one per day. The picture is hardly any brighter for onshore inventories, which are at their lowest level since 2016, according to the International Energy Agency’s latest report.

Another spanner has been thrown into the already struggling hydrocarbons market: soaring freight costs. Chartering a VLCC**** to transport crude from the Middle East to China now costs around $35/bbl, compared with a range of just $1–3/bbl over the past five years! The tanker market, which had already lost 17% of its capacity as a result of international sanctions, must now contend with two additional constraints: rerouting around the Bab el-Mandeb Strait, threatened by Houthi militias, and the logistical challenges of navigating the Strait of Hormuz. Since few shipowners are willing to take the risk of transiting the strait, their role is now largely confined to shuttling crude to tankers stationed offshore in the Gulf of Oman.

This “shipping crisis”, to borrow the words of the head of trading house Vitol, is affecting different crude grades unevenly. Brent, the international benchmark, is relatively advantaged by the current configuration, given the short distance between Rotterdam and the British and Norwegian fields that underpin the benchmark*****. Other crude grades imported into Europe, notably US WTI and Kazakhstan’s CPC Blend, face an additional transport cost disadvantage of $10–15/bbl. As a result, the oil market, once the epitome of globalisation, is undergoing an accelerated process of regionalisation, despite Middle Eastern exports having recovered to around 10% of their pre-conflict levels, according to Morgan Stanley.

The picture is only marginally better for the liquefied natural gas (LNG) market. In August, export volumes stood at just 5% of their January level; according to consultancy Kpler, that figure has recently recovered to around 30%. However, damage to two LNG trains at Qatar’s Ras Laffan liquefaction plant, combined with the risk of LNG carriers exploding if attacked, is unlikely to allow flows to normalise quickly. Europe is therefore heading into winter with its gas storage facilities only 64% full as of 17 October, a historically low level.

Against a backdrop of competition with Asia for available supplies, European gas prices have embarked on another leg higher, with the December TTF contract reaching €97/MWh, its highest level since August 2022. This leaves Europe in an uncomfortable position over the coming months, with prices vulnerable to a drop in temperatures or a renewed decline in exports from the Persian Gulf.

The situation appears even more precarious for refined products, particularly because of freight costs. Tankers carrying diesel, gasoline and jet fuel are generally smaller than crude carriers but must bear the same transportation costs, making the economics considerably less favourable. As a result, export volumes are running at only half their level at the beginning of the year, while inventories have fallen significantly.

Among middle distillates, diesel is where tensions are most acute, particularly given growing consumer discontent in the United States ahead of the midterm elections. Mounting voter frustration has prompted the US administration to strike a deal with Moscow after considering restrictions on exports. Russia is therefore expected initially to ship 300,000 tonnes of diesel to the United States in exchange for sanctions relief.

For context, these volumes amount to 2.5 million barrels, compared with US diesel exports of 1.5 million barrels per day. This may explain why the announcement had only a limited impact on the US diesel crack spread. In its latest monthly report, the IEA estimates that Russian and Middle Eastern supplies have suffered combined losses of 1.3 million barrels per day, only partially offset elsewhere, resulting in a net year-on-year decline in exports of 700,000 barrels per day. The agency does not expect the diesel market to return to normal before the second half of 2027.

It is against this backdrop of instability that TotalEnergies, whose Integrated Power division now accounts for $30 billion in capital employed, held its investor day to update its medium-term outlook. Its chief executive, Patrick Pouyanné, believes the geopolitical situation will inevitably accelerate electrification, driven by the price signals being sent to consumers by the market. In this respect, the recovery in the 12-month Brent futures price is striking: it has risen to $87/bbl, compared with $70 in July.

This simple yet powerful economic mechanism of price signals makes an acceleration in electrification highly likely. Investors seeking to benefit from this long-term trend will therefore have little difficulty identifying sectors and stocks exposed to the expansion of energy infrastructure spending—across generation, transmission and storage—after decades of underinvestment.

* Jackson Hole, 2023.

** December Brent futures contract.

*** United Kingdom Maritime Trade Operations.

**** Very Large Crude Carrier.

Pierre Pincemaille, General Secretary of Investment at DNCA. This article was finalised in October 23rd, 2026.

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