Will the world’s marginal supplier please stand up?

Deep Dive Summary:

• Far East buyers focused more on securing supply than waiting for open arbs
• Current US exports back to normal levels despite the chaos
• One big lever left to coax US barrels back into the global market

The first time the unimaginable happened the market ran $20/bbl higher in just a week. And now four months later, with the global oil market on arguably weaker footing it took three weeks to cover the same amount of ground. In March, the market, stunned by the gravity and relative ease with which Hormuz was effectively closed, saw a clear trade and seized it. A few months later, serious peace prospects and meaningful work-arounds pressured futures markets back lower in June only for these hopes and solutions to be undone in July. From a technical trading standpoint, the gap higher in the Brent chart as the war kicked off was filled at the end of June (on continuation chart) and the Fibonacci retracement from the highs from the second week of March to the lows of June suggested a move back to the $100/bbl area, a feat achieved this last week. So where does the market go from here?

Volumetrically, flows from AG countries are stronger than they were in mid-March namely with the Saudi East-West pipeline ramping up and getting barrels to market via the Red Sea. Unfortunately, the Houthis entered the fray once again and attacked vessels transiting the Bab al-Mandab. This past week has also seen CPC loadings halted and Kazakhstan throttling back the mighty Tengiz oil field, continued attacks on Russian oil refineries, and Hormuz flows continue to be restricted. Reuters reported only 7 oil tankers transited the Bab al-Mandab and fewer than 10 crossed the Hormuz on Sunday. By Monday, CPC terminal looks operational again.

Re-routing vessels to go north through the Suez from Yanbu and other West Coast Saudi ports is a viable option but bottlenecks could emerge depending on the amount of overall traffic. In normal times, vessel traffic could go in one end of the Red Sea and out the other. In this case, like we saw in late 2023, the canal remains the only means of bringing vessels to the region. The EIA reported that 4.5Mb/d transited the Suez/SUMED region on average in 2023 in addition to 4.3Mb/d of refined products and 4.1Bcf/d of LNG. Most of the flows that had been going through Bab al-Mandab headed East to India, Southeast Asia, or North Asia. Being forced to go through the Suez means adding 10-20 extra days of transit time and, of course, limits vessel size to a Suezmax, VLCCs need not apply. In addition to longer transit times the Suez Canal Authority recently raised surcharges on crude tankers (rates increased for both laden and unladen vessels). If the Houthi and Hormuz blockades persist, we could see Atlantic-based (including USGC, North Sea, and WAF) benefit from slightly lower VLCC rates while Suez rates strengthen. Based on attacks the Houthi launched on Israel in 2024/2025, the Suez Canal could be targeted by those same weapon systems. The increased cost in both time and money for Asian buyers is a major headwind.

Interestingly, some Far East crude buyers have seemingly skipped the arbitrage line and focused on securing volumes for August and September. Some buyers locked in cargos directly from the USGC whilst others have made rare appearances in the Platts North Sea window going so far as to retain a chained cargo.

October light crude deliveries across the globe look a little more expensive than normal this past week, especially when AG origins are removed. WAF lights continue to price a little cheaper than normal into the Far East likely helped by news of very strong programmes for key grades like Bonny Light and Forcados. Between them, Nigeria plans to add around 187kb/d [5.6MB for the month] more volume for September loadings than they offered in August.

Non-AG sourced medium grades delivered to the Far East remain challenged with only South America and WAF origins pricing close to 12-month norms while grades from GOM-Caribbean region near 12-month highs.

Meanwhile, US crude oil exports have fallen back to the middle of the 5-yr range. The Sparta platform shows WTI delivered to Far East remains relatively expensive. On the other hand, WTI into NWE looked workable on VLCC and Suez around mid-week but ended the week looking very expensive again. Strong TD25 freight markets have kept Afra-sized cargos on the expensive side of the ledger for the past 10 or so trading days.

US crude oil stocks have been below the 5-yr range for the past 5 weeks. While USGC (PD3) stocks are at the bottom of the range (and about level with year-ago), Midwest stocks (PD2) are well below 5-yr range and year-ago levels. Cushing stocks get most of the attention, and for good reason, but it is the Midwest stocks outside of Cushing, that are becoming concerning. Without diving too far into US crude pipeline dynamics, we must note that there are very limited ways of moving PD3 inventories (or USGC imports) into the Midwest. For the various non-Cushing PD2 hubs to rebuild stocks would mean keeping more PD2+PD4 production and/or Canadian pipeline imports for the region at the expense of PD3.

US WTI basis markets have been moving up all month, more or less in lock step with each other and not allowing a definitive open arb from the Permian North (to Cushing) or South (to Houston). WTI Houston diffs remain much closer in price to what we saw in February before the war kicked off than what we saw in the March-May time period. It is, therefore, hard for us to argue that this differential (or by extension nearby swaps) needs to ‘do the work’ to open the export arb. Afra freight to NWE [TD25] has been climbing all month as the number of available vessels has been dropping. Conversely VLCC freight to NWE has come down, in steps, through the month thanks to a near-normal supply of the larger vessels. Even with VLCC freight currently pricing around $5/mt below normal, cargos are still landing nearly $4/bbl above 12M average.

In the context of severely restricted crude oil flows from Hormuz, Bab al-Mandab, and vulnerable Kazakhstan/CPC flows, current WTI exports look underwhelming. The internal tension on the US crude market, at once torn between very low Midwest stocks and the desire to be the marginal supplier of crude to the market, will only be broken by Brent strengthening relative to WTI to levels seen earlier in the war. Time is short. There is only one more month of awarded US SPR releases left, then effective US supply will drop by just under 1Mb/d relative to what we have seen since April. Seasonal refinery maintenance will likely curtail refinery demand by at least that much in October but by December we would expect refinery demand to soar again.

About the Author
Aaron Kildow | Crude Commodity Owner, Sparta Commodities
Aaron is Sparta’s Commodity Owner for crude, covering physical and financial oil markets, hedging structures, and customised oil balances. He co-founded The Oil Balance and spent over a decade at Macquarie Group building supply/demand models for Cushing, PADD 1, and PADD 3, with earlier trading and derivatives roles at CHS, Musket Corp., and Prudential Financial.
 Connect: LinkedIn

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