War kindles anew from the ashes of the MOU

• Asian markets well supplied with PG barrels at the moment
• European and Asian markets more comfortable with unusual supply origins than they were in March
• US SPR Still has ~35MB of awarded barrels to move into market by end of August

Asian markets well supplied with PG barrels at the moment

European and Asian markets more comfortable with unusual supply origins than they were in March

US SPR Still has ~35MB of awarded barrels to move into market by end of August

Tension, violence, and hostilities continued to ramp up over the past week triggering the largest weekly gain on Brent futures since late April. The brief respite given to European and Asian markets on the rush of takers evacuating the PG last month is fading as the last of those vessels will likely make it to their delivery locations sometime in the next few weeks.

From an arb standpoint, light arbs into Far East seem a bit unbothered by the barking dogs of War in the ME; by Friday 13 light crudes were showing a mere 1-3 regional score on arbs radar (e.g. Med/Black Sea, WTI, and Olmeca, meaning arbs were valued on the lower end of 12m rolling average), 6 registered near-normal scores, and only 3 scored very high (e.g. Murban, signaling arbs for these grades were near the strongest they’ve been on 12m rolling average).

While there have been some news stories suggesting vessel traffic through Hormuz is not at a complete standstill, rhetoric from both the US and Iran suggest that the fighting and destruction will continue to escalate. Iran this past week has also (finally?) threatened Bab al-Mandab via the Houthi and with them embedded IRGC personnel.

Global light arb opportunities into NW Europe seem much more balanced than Asia. As of Friday, 10 grades were scoring high and 11 scoring very low. The typical BFOET grades naturally fit in well in their domestic market while WAF grades appear cheap relative to both NW Europe and the Far East. It, therefore, seems likely Northern Europe will attract autumn swing barrels rather than the Far East.

Export arbs from PADD3 remain very challenged as strong refinery demand and low inventories have crimped export volumes. As we can see from Arbs Radar, we would not expect GC light crude exports to improve anytime soon as the only real workable arb appears to be lights grades into the Med (where local grades are very strong).

Medium grades are fairing moderately better with NW Europe and Med being only somewhat workable from an origin view but facing too much competition from a global view where several grades are landing cheaper than Mars, and more importantly, several grades are showing complex margins $5-$10/bbl higher than Mars.

With USGC arbs currently pricing to keep light sweet barrels state-side, Cushing and PADD3 inventories could see builds over the next several weeks. We should keep in mind that there are still somewhere around 35MB of US SPR oil that has been awarded but not yet delivered. The majority of these SPR deliveries would technically need moved into private/corporate control by the end of August thus adding further downside pressure to the front end of the curve.

According to our best guess, around 75% of the number of remaining SPR deliveries is for medium crude. Again, based on our best guess, nearly 11MB will need to be returned in Q4 26 the bulk of which being medium sour.

Based on recent rig counts and forward curve valuations, we could also see another uptick in US crude production late Q3 / early Q4. This growth would come in the form of light sweet shale crude and not medium sours.

Given US refined product inventories and sky-high refining margins, planned seasonal Fall maintenance programs will likely be smaller than normal. Buying Q4 or Dec Mars basis swaps may be a lower risk way of playing the seemingly Boolean Hormuz lottery, especially if the basis market softens over the next few weeks. Bottom line here is this:

As long as ME flows remain below normal the global medium sour market will remain tight

For now, Far East is pricing like they are well supplied on the recent PG supply surge, but for how long?

Due to long voyage times USGC Medium Sours loading mid Aug wouldn’t reach Far East until early October.

Right now, European markets are pricing late summer / fall maintenance season barrels implying lower overall refinery demand

A lot can happen geopolitically in the next few months but late Q4 refinery demand should be quite strong especially if Hormuz/Bab al Mandab remain chokepoints.

We remain bullish on near-term flat price given the massive increase hostilities over the past week.