Three fronts and no off-ramp

Commentary summary:

• Tuesday’s Hormuz deadline is the week’s major binary with Trump social media making off ramps now appear remote.

• USGC crude is the one barrel that clears everywhere, and TD25’s collapse has blown the arb wide open.

• Russia’s Baltic ports are resuming but degraded; 40% of Primorsk storage is gone and that doesn’t rebuild quickly.

As I write this Monday morning US AM hours the hopes of an offramp look bleak. US and Israeli strikes killing 25+ in Tehran overnight, the IRGC intelligence chief among them, Iran launching missiles at Israel, Kuwait, and the UAE in response, and Trump’s Tuesday deadline for Hormuz now less than 36 hours away with neither side showing any confirmed appetite for compromise.

Brent is at $108 at time of writing. There’s a ceasefire proposal on the table from Egyptian, Pakistani, and Turkish mediators for 45 days and calls for reopening of the Strait, but neither Washington nor Tehran has acknowledged.

I’ll note that we’ve seen these proposals before and Iran’s stated position remains that it wants reparations and a guarantee against future attacks, neither of which is remotely on offer.

We said last week that flat price felt too relaxed and that asymmetric risk was still skewed higher even at $115. Brent did pull back modestly from those highs (basis the Easter weekend illiquidity), but the escalation path we feared has continued and arguably intensified.

The April 6 deadline has been extended once already from late March and there’s a credible argument Trump extends again (he posted “Tuesday, 8:00 P.M. Eastern Time!” yesterday, which may already be a one-day push).

But the pattern of empty deadlines eventually erodes credibility, and at some point either Tehran calls the bluff or Washington follows through.

If it’s the latter with strikes on power plants and bridges apparently in scope we’re looking at $120+ Brent and a further fracturing of whatever residual AG supply is still trickling through.

This is not to even mention the tangent escalation vectors like action in the Red Sea.

The physical market continues to bifurcate along the lines we’ve been tracking. The USGC remains the one genuinely actionable story, and it got significantly better this week. TD25 has collapsed $54/mt w/w to $81.59/mt (a near-40% drawdown) while TI/Brent sits at -11.80/bbl.

The maths on WTI Midland into NWE is almost comical: roughly $16/bbl undervalued on a landed basis given the extreme structure facing Dated indexed crudes (DFLs >$13).

The Aframax list in the Gulf is still dire at 4 open ships against a 10-ship norm, so freight isn’t cheap in absolute terms and with a tight list pricing direction likely still skewed higher, but the discount is doing such heavy lifting that it barely matters.

This is cleanest flow in the market (US export acceleration into Europe) and the TD25 correction has only widened the window. I’d be surprised if this doesn’t generate a surge in fixtures in coming weeks.

This in contrast to North Sea grades fighting to stay above water in their own backyard. The risk appears sharply asymmetric to the downside on any demand softening for North Sea grades.

(Light margins looking questionable into NWE but North Sea grades largely at a margin disadvantage to other Atlantic Basin lights)

On Russia, we flagged last week that Ukraine’s strikes on Primorsk and Ust-Luga risked getting buried under the Hormuz noise. Ust-Luga has just resumed crude loading (per Bloomberg, Saturday) but the damage is structural: satellite imagery shows 40% of Primorsk’s storage capacity destroyed, and tanker departures from both ports collapsed to a third of normal pace in late March.

The US Treasury issued a temporary licence to allow purchases of stranded Russian crude, a remarkable sanctions inversion that tells you everything about how tight the market has become. This is a slow-moving story that compounds over weeks, not one that resolves with a single headline.

Where does this leave us? The Tuesday deadline is the only trade that matters in the near term.

A ceasefire would trigger a violent unwind of the geopolitical premium, the 44-ship AG VLCC overhang would re-enter the market, tonne-mile demand would collapse, and Brent could give back $15-20 in days.

The absence of a ceasefire, or worse, a US strike on Iranian infrastructure, pushes us into genuinely uncharted territory on flat price. I don’t know which it is and don’t feel confident to even handicap outcomes.

Basis everything I’ve seen, the path of escalation remains more probable than the path of de-escalation, especially given Trump’s Easter Sunday social media folly doing work to obliterate any offramps for himself.