Middle East tensions ratchet up arb imbalances

Commentary summary:

• EFS blows out, eventually will have to normalise.

• WoS arbs into Asia are closed on paper but in a severe escalation case relative econs will take a back seat.

• US crude stocks continue to draw; WTI is looking cheap into Europe, something that may not be sustainable for long.

Writing an arbs-based piece this morning is evidently an undertaking of limited value given world events. Trading will focus on managing risk just now. We can still point out a few things to watch in the physical market and game out a scenario or two.

The flow of crude and products out of Hormuz is enormous and any threat to its function will send prices soaring again. Signs of a sustained reduction in geopolitical premiums will send Brent tumbling and with it spreads and the EFS (but trading this just now is gambling).