Middle East Oil Exports Have Rebounded, but We Expect Fuel Prices to Stay High

In September, with the Middle East conflict widening from the Strait of Hormuz to the Bab el-Mandeb Strait in the Red Sea, we said that even a deal between the US and Iran would not bring fuel prices or interest rates down quickly, because the shortage was in refining capacity, not in crude supply.

Since then, Kpler data show Middle East crude exports, excluding Iran, recovered to about pre-war levels by late September, hopes of a deal have come and gone more than once, and bond yields have slipped back from their highs. Yet crude oil prices remain high, with Brent trading at around USD 115 on 30 October, about 11% above where it stood when we last wrote on 18 September.

Despite the recovery in flows and the pullback in yields, it has become far more expensive and risky to move oil and fuel to market, and that extra cost, together with the risk of further attacks, is what keeps prices high. We expect oil and fuel prices to stay high for the foreseeable future, and we think investors should plan for that.

The problems we flagged in September are still here

Refining is the clearest example. We said the real limit on fuel prices was refining capacity, not crude supply, and the oil majors’ own guidance now backs that up. Shell indicated a record refining margin of USD 42 a barrel for the third quarter, up from USD 24 in the second, and TotalEnergies said it captured historically high refining margins. Damaged refineries cannot be rebuilt quickly, so we expect fuel to stay expensive well after any deal, and the International Energy Agency expects diesel shortages to last well into 2027.

Inflation and interest rates are following the same pattern. We said inflation would be sticky and interest rates would stay higher for longer. US consumer prices rose from 3.4% in August to 3.7% in September, and the Federal Reserve, the European Central Bank and the Bank of Japan all raised rates that month. The US 10-year bond yield then touched about 5.3% in early October, its highest level since 2002. With price pressure spreading, we expect central banks to be more likely to raise rates than cut them.

The conflict is not heading for a quick end either. The Houthis, the Iran-aligned group in Yemen, have shattered a truce that had largely held since 2022 and are attacking Saudi Arabia’s airports and oil sites, with Reuters reporting at least 18 people killed across four attacks on Riyadh’s main airport. We think the risk of further attacks will stay high.

More oil is moving, but moving it now costs far more

Before the war, a tanker sailed into a Gulf port, loaded and went straight to its buyer. Now the oil is relayed: tankers carry it out through the Strait of Hormuz under US Navy escort and hand it over at sea to ships that take it on to Asia. Windward says Gulf producers have assembled a fleet of nearly 230 tankers, tying up 15% to 20% of the world’s supertankers. With fewer ships free and each tied up for longer, the International Energy Agency (IEA) says the cost of hiring a supertanker for the Gulf-to-Asia route reached over USD 1.3 million a day by mid-October, while Signal Ocean puts the 2025 average at about USD 55,000 a day.

The IEA estimates that shipping crude from the Gulf to Asia on a large tanker cost over USD 37 a barrel by mid-October, more than five times the level before the war. The same pressure is visible outside the Gulf: LSEG data cited by Reuters show freight took more than 40% of the price of a barrel of US crude in mid-October, against about 7% on average in 2025.

The danger at sea adds to the cost. Kpler said on 19 October that at least 18 attacks on ships had been reported over two weeks, and Iran’s Revolutionary Guards Navy said on 30 October that four tankers had caught fire in the strait.

These costs would take time to unwind even after a deal.

Even if crude normalises, fuel would stay expensive

Even if the conflict were to end now and crude oil flows and shipping costs returned to normal, fuel would stay expensive, because refining capacity is short and damaged refining units take months to restore. This matters for inflation. Diesel and other fuels move food, goods and construction materials, and higher fuel costs tend to spread into consumer prices.

Diesel is where the shortage is most visible. 

Russia will reportedly keep its diesel export ban until the end of the year but allow exports under quotas, which quadruple to about 500,000 barrels a day in November. While that may ease supply, it is still below last year’s average. Kpler data show Russia exported only 141,000 barrels a day in September, against 608,000 a year earlier, so even the full amount would leave exports below last year’s level. The Middle East is no better. Kpler says diesel exports through the Strait of Hormuz are down about 540,000 barrels a day from a year ago, and with Russia’s losses, global diesel exports are down about 1 million barrels a day.

Diesel margins have eased from their mid-September peak, but they remain far above where they were when the war began. Bloomberg’s estimate of the US Gulf Coast diesel crack spread, the gap between diesel and crude prices, was USD 87 a barrel on 28 October, against a peak of USD 108 on 16 September and about USD 37 before the war (Chart 1).

Chart 1: Pump prices stay high as refining margins ease

Pump prices tell the same story. According to the American Automobile Association, US diesel averaged about USD 6.34 a gallon on 28 October, up 69% since the war began and close to September’s record of about USD 6.53. Petrol is up 42% to about USD 4.23 a gallon, from just under USD 3. Jet fuel is a wholesale price, but it tells the same story: the US Energy Information Administration puts US Gulf Coast jet fuel at USD 4.44 a gallon on 27 October, against USD 2.43 before the war (Chart 2).

Chart 2: US jet fuel prices are about 12% below their 2022 high

Rates are still heading up, but bonds now look more attractive

Price pressure is no longer limited to fuel. The US Bureau of Labor Statistics says core inflation, which excludes food and energy, rose to 2.6% in September from 2.4%, and producer prices, which track the prices producers receive for their goods, were up 6.3% from a year earlier, a pressure that tends to reach shoppers with a delay. Minneapolis Fed President Neel Kashkari says that even without energy and food, “inflation is still too high”. A peace deal would help but would not switch inflation off, so central banks cannot count on lower oil alone to bring it down.

The Federal Reserve held rates at 3.75%–4.00% on 28 October, with two policymakers voting for another 0.25 percentage point rise. Futures markets put the chance of a December hike at about 72% (CME FedWatch, 30 October). The US economy also grew at an annualised 3.4% in the third quarter, faster than expected, and the September personal consumption expenditures price index rose 0.5%, taking its annual rate to 3.6% (US Bureau of Economic Analysis). Rates are still heading up, though more slowly.

Table 1: Central banks are still leaning towards higher rates

Even so, bond yields have eased from their highs. The US 10-year yield peaked at about 5.3% in early October, its highest since 2002, and was just under 5% on 29 October. At that level it is still higher than at any point in 2024 or 2025. We think a yield of close to 5% is attractive, because the income it pays can cushion a price fall if yields rise again. Treasuries are also diversifying again: in October they rose on most days that shares fell, a pattern largely missing in 2022 and 2023. Because the fall has come alongside a sell-off in technology shares, it could reverse if shares steady, which is another reason to add slowly.

This is why we now suggest adding longer-maturity bonds slowly, after advising shorter-maturity bonds in August and September.

Portfolio positioning: add bonds slowly, keep Asia over the US

We do not suggest positioning for a quick resolution and a quick drop in fuel prices. With rates likely to stay high, we stay with Asia over the US in equities. In bonds, we suggest gradually adding longer-maturity bonds at current yields of about 5%.

Equities: higher rates for longer still favour Asia over the US. When rates stay high, profit earned soon is worth more than profit promised years away, which favours cheap, profitable companies with visible earnings. Asian equities trade at a discount to the S&P 500 despite faster expected earnings growth. The MSCI AC Asia ex Japan Index is trading at about 8.5 times expected earnings next year, against about 18.3 times for the S&P 500, a discount of about 53.6%, with earnings per share forecast to grow about 30.1% in Asia ex Japan and 14.7% in the US over the next year (as of 29 October 2026).

Asian semiconductors remain our highest-conviction idea. Earnings are still rising sharply: TSMC’s third-quarter revenue rose 51% from a year earlier in TWD terms, Samsung reported a record operating profit of KRW 107.4 trillion, up 783% from a year earlier, and SK hynix’s operating profit rose 632%. Samsung expects AI spending to accelerate in 2027, which would tighten memory supply further, and Micron also expects shortages to last into 2028. SK hynix’s long-term contracts, which cover more than half of its 2027 and 2028 capacity and are backed by customer deposits, also make orders more predictable.

In China, we like two ways to own AI: hardware and internet platforms. Hardware makers, such as chip, equipment and electronics companies, earn from corporate AI spending and exports, so they are largely insulated from weak household demand. Internet platforms, such as Alibaba and Tencent, offer AI exposure at a discount.

Singapore offers resilience and income. Its earnings rest more on banks, industrials and property trusts than on AI, so it fell less than tech-heavy markets when chip shares sold off. Singapore shares also offer a projected dividend yield of about 4.3% to 4.6%, which is cash paid to you today and suits an environment where rates stay high.

In the US, we stay underweight overall, but we make room for internet. Third-quarter results show that demand for AI computing is not the constraint: Azure revenue rose 48%, AWS revenue rose 39% and Google Cloud revenue more than doubled, while Microsoft says demand still exceeds its supply and Amazon says customers are taking up capacity almost as fast as it installs it.

Bonds: keep most holdings short-maturity, and start adding longer maturities slowly. Our August and September suggestion to favour short-maturity bonds remains valid for the core. But at a yield of close to 5%, longer-maturity bonds now pay enough income to cushion a further rise in yields. Because inflation and rate rises are not behind us, we suggest adding them gradually, not all at once.

Table 2: Recommended Products

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds positions in iShares Hang Seng TECH ETF and Global X Asia Semiconductor ETF.