An analysis of market conditions reveals a combination of headwinds for oil prices. The absolute price of crude oil experienced a significant decline last week, influenced by the US-Iran memorandum of understanding. As of Friday's close, the front-month Brent crude contract (August) settled at $71.99 per barrel, the front-month WTI contract (August) settled at $69.23 per barrel, and the front-month Dubai crude contract (August) settled at $64.69 per barrel.
In terms of inter-month spreads, the spreads for the three major benchmarks weakened significantly in line with the outright price movement. The Brent M1-M2 spread fell to -$0.61 per barrel, the WTI M1-M2 spread retreated to $0.30 per barrel, and the Dubai M1-M2 spread dropped to -$1.44 per barrel. Dubai crude, being the benchmark most impacted by developments in the Strait, exhibited the weakest outright price and spread structure. This indicates that the pace of supply recovery from the Persian Gulf is currently far exceeding the pace of demand recovery in China, with the market focusing on the supply shock in the short term.
Looking at the forward curve, front-end contango has decreased. The Brent forward curve has flattened into a contango structure, while WTI remains relatively stronger, maintaining a backwardated structure across the curve, though the front-end premium has notably declined. Regarding regional spreads, the Brent-Dubai EFS spread for the front-month contract continued to fall to $4.45 per barrel, and the WTI-Brent spread for the front-month contract narrowed to -$2.81 per barrel. The weakness of Dubai relative to Brent, and Brent relative to WTI, has led to the closure of arbitrage windows between East and West and across the Atlantic. This is expected to result in a significant decline in US crude exports and crude shipments from the West to the East.
Physical crude differentials have also shown weakness. The differentials for North Sea benchmark grades like BFOET saw a slight decline, with Forties and BNB crude differentials turning negative. West African crude differentials plummeted, with some grades even showing discounts exceeding -$10 per barrel. Middle Eastern crude differentials fell significantly, with grades like Al-Shaheen and Upper Zakum trading at discounts of over $10 per barrel against the Dubai benchmark. North American crude differentials remain relatively stable, supported by low inventories, while Latin American crude differentials also experienced a sharp decline. The overall weakness in the physical market is comparable to conditions seen in 2020.
In contrast, refined product crack spreads have shown stability or even strength. Gasoline crack spreads, in particular, have rebounded to historically high levels. The impact of the Strait's reopening on product supply is less severe than on crude supply and requires refinery restarts for full effect. Among refined products, gasoline supply is less impacted. Global refinery margins remain elevated.
Turning to inventory data, according to Kpler's high-frequency figures, global seaborne and onshore crude inventories (excluding China and US SPR) recently rebounded to 3.01 billion barrels. While this is down nearly 130 million barrels from late February, and onshore crude inventories alone are at a five-year low of 1.75 billion barrels, the pace of inventory drawdown has slowed. Floating storage has also seen changes. Seaborne crude in transit (including floating storage) increased to 1.26 billion barrels, while dedicated floating storage declined to around 100 million barrels, mainly due to rapid drawdowns in the Persian Gulf. Sanctioned oil held in floating storage also decreased to 260 million barrels, primarily following the US military's easing of the blockade on Iran.
Currently, a sharp decline in Chinese crude imports (down 5 million barrels per day) coupled with a significant increase in US exports (up 2 million barrels per day) has largely offset the reduction in Middle Eastern crude exports (down 10 million barrels per day post-conflict). This has led to a global inventory drawdown significantly slower than expected. The recent notable recovery in Persian Gulf flows is also converting floating storage into available inventory.
Chinese onshore crude inventories have recently decreased to around 1.2 billion barrels (satellite-based floating roof tank data, excluding underground SPR). The drawdown pace is relatively slow, mainly because significant refinery run cuts have offset the import decline, and China had engaged in crude overbuying prior to the conflict. However, due to weakening domestic product demand and refinery adjustments to reduce chemical output in favor of fuels, domestic refined product inventories have increased notably, reducing pressure on refineries to ensure supply. Chinese crude arrivals have fallen to 6 million barrels per day and remain on a downward trajectory. Uncertainty surrounding the Strait's navigation and high freight costs mean China is still in a phase of prioritizing inventory drawdown.
Regarding crude shipping schedules, following the US-Iran memorandum, the International Maritime Organization began facilitating the evacuation of vessels from the Persian Gulf, leading to a significant increase in vessels transiting the Strait. Middle Eastern crude loadings have recently rebounded to 10.5 million barrels per day, though this remains substantially below the pre-conflict level of 19 million barrels per day. Iranian crude loadings have also recently bottomed and started to recover, but the recovery is not pronounced, with initial efforts likely focused on drawing down floating storage. However, last week's attack by the Iranian Revolutionary Guard on a container ship highlights the continued fragility of the Strait's reopening.
Russian crude loadings increased to 4.2 million barrels per day. Recent ongoing Ukrainian attacks on Russian refineries have reduced domestic demand, freeing up more resources for export. CPC crude loadings remain high at 1.7 million barrels per day, and Azerbaijani loadings are steady at 500,000 barrels per day. In North Africa, Algerian loadings hold at 500,000 barrels per day, and Libyan loadings at 1.2 million barrels per day. Latin American crude loadings are maintained at 6.6 million barrels per day. Brazilian loadings remain high at 2.5 million barrels per day, Mexican crude loadings rebounded to 600,000 barrels per day, while Venezuelan loadings fell to 1 million barrels per day, with shipments shifting from China to the US, Europe, and India. The impact of the recent earthquake in Venezuela on crude exports remains unclear, with news reports indicating no damage to major production, refining, or export facilities. Guyanese loadings are steady at 900,000 barrels per day. US crude loadings retreated to 5.1 million barrels per day; although lower, they remain significantly above pre-conflict levels. US refined product exports are up 500,000 barrels per day year-on-year, reaching 3.1 million barrels per day. Canadian crude exports are maintained at 800,000 barrels per day, with refined product exports also increasing.
In terms of refinery maintenance and margins, Russian refinery offline capacity reached 3.9 million barrels per day this week. Previous Ukrainian attacks, including two targeting Moscow, caused fires and damaged two major processing units, leading to operational suspensions. On June 24th, Ukrainian drone attacks hit the Ufa Oil Refinery and Novoil refinery at the Ufa hub, causing explosions and fires; however, Russian oil companies stated key processes were unaffected and operations continued. A drone attack on June 24th also led to the suspension of operations at the Norsi refinery. An attack on Tyumen on June 20th was repelled without damage. Refineries in Tuapse, Kirishi, Astrakhan, Volgograd, Ryazan, and Taneeko remain offline due to attacks, while refineries in southern Russia, such as Afipsky, Ilsky, and Novoshakhtinsk, are partially operational. The Kuibyshev refinery at the Samara hub remains offline after a drone attack, with the Novokuybyshev and Syzran refineries at the same hub operating at significantly reduced capacity. Planned maintenance at the Atyrau refinery is scheduled from June 26th to July 15th. Recent completion of maintenance at refineries like Omsk has partially offset production losses. The Komsomolsk refinery has partially restarted, with most maintenance postponed until June.
In the Middle East, average refinery outages this week stand at 1.7 million barrels per day. Despite ongoing operational challenges, several refineries previously thought to be completely offline are now operating at reduced capacity, particularly in Kuwait and Saudi Arabia, where throughput is showing signs of gradual stabilization. Iran's Lavan refinery has resumed partial operations, with current utilization around 70%. Bahrain's Sitra refinery remains offline and is expected to resume operations in July. Saudi Arabia's Samref, Yasref, and Jazan refineries are fully operational and increasing exports, while the Ras Tanura refinery is gradually restarting. Syria's Baniyas refinery has begun a five-month shutdown for expansion, while the Homs refinery restarted operations after maintenance. Qatar's Ras Laffan refinery is operating at reduced capacity but plans to reach 50% operational capability in the coming weeks. For the week ending July 3rd, Middle Eastern refinery outages are projected to remain around 1.03 million barrels per day.
On the geopolitical front, the Russia-Ukraine situation remains at a stalemate, with Ukraine maintaining a high intensity of drone strikes against Russia. In the Middle East, following last week's US-Iran memorandum, a ceasefire agreement was also signed between Lebanon and Israel. However, subsequent attacks by the Iranian Revolutionary Guard on a merchant ship near Oman and retaliatory US strikes on Iran highlight the fragility of the ceasefire and the instability of the Strait's reopening. Fundamental disagreements over control of the Strait persist, and the situation remains prone to volatility.
Overall Outlook and Strategy
The current exceptionally weak physical market suggests oil prices have not yet found a bottom. While geopolitical tensions show some fluctuations, the overall trend is towards de-escalation. This, combined with the current bearish macro sentiment, creates a triple headwind from macro, geopolitical, and fundamental factors. It is anticipated that oil prices will continue to decline in search of a bottom, potentially revisiting the $50 to $60 per barrel range seen before the internal unrest in Iran. Only when the front-end contango provides sufficient arbitrage opportunities will conditions for price stabilization emerge.
Given the numerous uncertainties facing the oil market due to the Middle East situation, participation carries elevated risk. Utilizing options instruments to hedge risk is recommended.
Key Risks to the Forecast
The primary downside risks include a further easing of Middle East tensions, full restoration of Strait navigation, and a global economic crisis triggered by high inflation. The main upside risks are a resumption of war between the US and Iran, and a global oil inventory drawdown reaching a critical threshold, causing a substantive supply shortage.
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