Citi: Short-term upside risks in the oil market remain significant; non-normalized Middle East export logistics push up delivery costs.

Citi released a research report stating that despite some recovery in Arabian Gulf crude flows, short-term oil market risks remain skewed to the upside, as logistical inefficiencies have caused freight dislocation, preventing delivered supply from fully normalizing, while geopolitical risks may resurface around the Israeli Knesset and U.S. midterm elections. The normalization of Arabian Gulf crude exports is mainly reflected in volumes rather than logistics, with unprecedented shipping inefficiencies keeping landed crude costs elevated. VLCC freight rates from the Arabian Gulf to China have recently approached $250 per ton, equivalent to roughly $35 per barrel, more than 20 times the average level of the past decade; OilX data shows Middle East crude exports remain more than 4 million barrels per day below year-ago levels, with more than 1 million barrels per day of Arabian Gulf crude exports completed via ship-to-ship (STS) transfers in September. Due to sanctions, idling, and war damage, effective capacity is far below nominal capacity, with only about 784 of the world's more than 930 VLCCs currently in service. The bank also noted that under the U.S.-Russia diesel agreement, the U.S. government announced a six-month suspension of sanctions on Russian diesel trade, with Russia committing to export 300,000 tons to the U.S. in October, about 500,000 tons in November, and subsequently increasing to about 1 million tons. Russian diesel exports are expected to recover to about 500,000 barrels per day, potentially easing pressure on global gasoline crack spreads, but high freight costs and refinery constraints may slow the transmission of additional supply into lower landed product prices. Regarding client meetings, the market generally expects U.S.-Iran tensions to persist as a prolonged, low-intensity state, with the oil market likely to show choppy but gradually firming conditions rather than a sharp geopolitical premium; conviction on the forward curve is weaker, as regional tensions extending beyond 2026 could support forward oil prices, though a diplomatic breakthrough could also quickly erase the geopolitical premium embedded in long-dated contracts.