War premiums rise but physical crude still cooling

Commentary summary:

• May might still be too early to call maximum competition for global physical crude, with SPR draws, weaker Chinese buying, and quality mismatches all extending the timeline towards summer.
• Perhaps Brent’s full physical rally can only start once WTI-Rotterdam closes off and both US and European runs are maxed out seasonally.

As we said last week, crude futures are waking up to protracted SoH closure as well as what looks like potential for a new stand-off between the US navy and the IRGC in the Strait this week.

The chances for a strong rebound in transits still seem remote. Chances for conflict escalation are growing.

Whilst Brent has been hitting war-time highs on a flat price and spread basis, physical premiums remain lacklustre as we observed last week.

In fact, Brent premiums fell another $3.0-5.0 per barrel w-o-w, depending on the grade, down to levels that aren’t even that far removed from average 2025 – quite surprising in this environment. Angolan diffs also plummeted (think Chinese buying or a lack thereof).

Murban and Oman diffs also fell strongly w-o-w. There’s been talk of Asian players getting Upper Zakum via STS/storage sites at Fujairah/small vessel shuttling, but steady flow of UZ is unlikely.

The huge premiums reportedly being paid are very interesting and likely another sign that quality is currently king. Asian players are setup for this crude and some may specifically need to pay huge premiums of e.g. $20/b if there is a strong need in their own system and with base oils and lubes markets also needing serviced.

Heavier WAF or LatAm doesn’t necessarily fulfil these requirements 1:1. These quality issues are likely partly behind the lack of upside to physical crude in the WoS, even if there is plenty flow of for example WTI and LatAm to Asia.

(Simple margins in NWE)

So does physical reverse this week? If you look at simple refining margins in Europe, North Sea and WAF diffs have done enough to get us into the low single digit negative territory on economics. Perhaps that is fair value if you argue that a little bit of European utilisation is ceded to Asia.

But that only works only if we start to get a chunk more Brent-linked moving East, something which has only really been observed in limited fashion on WAF grades so far. And in fact what is reported to be limited Chinese buying in the market in general doesn’t give you confidence that more WAF will in fact go East.

What’s more, given the decline in relevant headline Dubai premiums, as well as the wide WTI/Brent currently in play, Brent-linked crudes need to lose $10/bbl on average on their premiums in order to start looking very competitive in Asia.

You can argue they don’t need to fall that far if we suppose that Brent is the last barrel to flow East, but $10/b landed premiums to WTI still feels a little too much and Brent-linked cracking margins in Asia are deeply negative too.

(Cracking margins in Far East)

For now then, it does feel that Brent physical could even soften a touch more (also looking at WTI Afra landed values being relatively cheap into NWE). At least in a normal market.

One question now is whether the crude futures rally impact diffs; normally chatter revolves around futures pulling up physical (e.g. DFL) when rallying.

So when does physical crude start to feel more pressure to rally in general in the next few months? It feels odd that diffs have come off so far in general.

But the fact is, apart from quality issues, China – the world’s largest crude importer – looks to have softened its stance on its own SPR. Sensible if one part of their reasoning is to keep global refining economics and ultimately global access to oil products supported.

Diffs in the Americas are benefiting from SPR release and US rejection of LatAm, some of which is heading East. SPR release in Japan and SK is softening their requirements for Brent-linked just now too, with WTI remaining the main replacement crude from the Atlantic.

This combination might well extend the timeline before physical crude fires higher — when maximum competition for barrels will emerge. It might not even be in May, but perhaps only in June or July.

Trades? WTI/Brent feels very hard to call short-term and I am at least guilty of being too early on the call for a narrower spread basis low US inventory draw (while TD25 has been rallying too).

Total US crude is drawing hard but commercial stocks need to see lower levels before the need to close the WTI arb to Europe really gets desperate.

Perhaps Brent’s full physical rally can only start once WTI-Rotterdam closes off and both US and European runs are maxed out seasonally.

About the Author
Neil is a senior oil market analyst specialising in crude oil, refined products, and biofuels, with particular depth in refining economics, fundamental strategy and price modelling. He has held analytical roles at OilX and JBC Energy, and his market intelligence is regularly cited by Reuters, Bloomberg, and the Wall Street Journal.
Connect: https://www.linkedin.com/in/neilcrosbyuk/https://x.com/NGCanalyst

About Sparta

Founded in 2020, Sparta made waves in the commodity analytics space in March 2022 when it secured a $6m series A investment from Singular. This success then later snowballed into a further $17.5 million in a series A funding round led by the technology venture capital firm FirstMark, with participation from existing shareholder, Singular.

The platform, created by former traders Miles Moseley and Felipe Elink Schuurman, is designed to answer a common problem shared by most traders: 90% of pricing data required to make trading decisions is kept in silos and shared manually by voice, email, or chat.

Sparta breaks these existing data silos and combines the physical and paper markets to provide traders with live access to global raw prices, from futures and swaps to forward freight and physical premiums. We work with clients globally, including Philips 66, Chevron, Trafigura, Equinor and more.