Iraq offers crude buyers a way around the Strait of Hormuz for the first time since war began

When a waterway handles roughly a fifth of the world’s oil and becomes a war zone, the math for energy markets gets uncomfortable fast. Iraq just made that math a little less terrifying.

Iraq’s state oil marketing company, SOMO, issued new tender terms on August 27 allowing buyers of Basrah Medium and Heavy crude to take delivery via ship-to-ship transfer near the Omani coast. It is the first time since the Iran war began in February 2026 that buyers have had the option to collect Iraqi oil without transiting the Strait of Hormuz.

From 3.3 million barrels a day to 100,000 and back again

To understand why this matters, rewind to the early months of the conflict. Iraqi southern oil exports were running above 3.3 million barrels per day before the war started. By May, that figure had collapsed to roughly 100,000 barrels per day, a drop of more than 97%.

The cause was straightforward: buyers simply refused to send tankers into a live combat zone. Discounts offered to entice buyers grew extraordinary, reaching as steep as $33.40 per barrel for Basrah Medium in May. Even at that price, the market was thin.

By August, exports had clawed back to around 2 million barrels per day, still well below pre-war levels, and discounts were running between $25 and $29.80 per barrel. The new STS option is SOMO’s bid to close that remaining gap.

The ship-to-ship mechanism works roughly like a mid-ocean handoff. A vessel loads at the Iraqi terminal, transits the Gulf to calmer waters near Oman, and transfers its cargo to a second tanker there. The buyer’s ship never enters the high-risk zone.

Why the Hormuz problem is structural, not temporary

The Strait of Hormuz is roughly 21 miles wide at its narrowest point. Virtually all Persian Gulf oil exports flow through it. Iraq’s geography makes this particularly acute. Its primary export terminals sit at the northern end of the Gulf. Every barrel loaded there has to travel the full length of the waterway before reaching open ocean.

The STS option near Oman does not eliminate that exposure for Iraqi tankers, but it shifts the risk from the buyer’s vessel to the first-leg ship. For a refinery operator in Asia or Europe weighing whether to bid on a Basrah cargo, that distinction is commercially meaningful.

The northern pipeline play running in parallel

The STS option is not Iraq’s only workaround. Baghdad has been working to expand its northern export routes, which entirely bypass the Gulf. The Kirkuk-Ceyhan pipeline, which runs from northern Iraq through Turkey to the Mediterranean port of Ceyhan, is one focus. Iraq has been exploring tripling flows through that corridor.

There are also reported discussions around routes through Syria. Northern routes carry their own constraints. Kirkuk-Ceyhan has historically operated well below its theoretical capacity due to disputes between Baghdad and the Kurdistan Regional Government over revenue sharing and production rights.

What this means for oil markets and buyers

For traders, the immediate question is whether the STS option is enough to bring discounts back toward more normal levels. The $25 to $29.80 range still in play during August suggests buyers are not yet convinced the risk premium should disappear entirely.

Iraqi southern exports at 3.3 million barrels per day represent a material share of global supply. Getting even partway back to that number from the current 2 million barrels per day would exert downward pressure on prices that have been elevated partly on supply scarcity fears.

For international oil companies and commodity trading houses, including Vitol, TotalEnergies, and ADNOC, the STS option potentially reopens a market that was functionally closed for several months.

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