NO FLOOD THIS TIME
The supply backdrop has also changed dramatically.
As the June 17 ceasefire approached, oil traders expected a flood of crude to exit the Gulf, as nearly 150 million barrels of oil had accumulated on hundreds of tankers trapped behind the strait.
That surge materialised, with around 70 million barrels of crude and refined products leaving the Gulf in the month following the June agreement, according to Kpler data. This deluge helped ease fears of shortages, providing relief to consumers, particularly in Asia, the region hardest hit by the energy squeeze.
Today, the picture is different.
Only around 80 million barrels of oil remain stored inside the Gulf, meaning any “flood” following a reopening will be considerably smaller.
The difference is visible in the structure of the Brent futures curve. Within days of the June agreement, the prompt contract slipped into a small discount to the next month, a structure known as contango that reflects expectations of near-term oversupply.
Today, the market is signalling the opposite. Prompt Brent contracts for October delivery are trading at a hefty premium of $1.50 a barrel to the November contract. This indicates that immediate supply tightness is expected rather than a short-term glut.
Oil trading has increasingly focused on prompt contracts in recent months as traders struggle to gauge the conflict’s evolution. Any expectation of rapid rebalancing today appears as lofty as it was in June.
"The risk premium unwinding over the last few days still continues to show physical tightness in the Brent structure," said Keshav Lohiya, CEO and founder of HiLo Analytics.
DIESEL ON FIRE
Inventories are also in a more vulnerable position today. The prolonged disruption at Hormuz has forced consumers to draw on fuel stockpiles during the peak summer demand season in the Northern Hemisphere. As a result, market buffers – which were already slim in June – have shrunk further.
This is particularly true for diesel. One of the most significant developments in the last two months has been the sharp deterioration in global diesel balances. Middle East disruptions have continued to curtail exports, while Russia, one of the world's largest diesel suppliers, shocked markets in July by banning exports after months of Ukrainian drone attacks severely damaged its refining facilities.
These dynamics sent diesel refining margins soaring to an all-time high of $75 a barrel on July 31. Although they have since retreated to around $63, they remain more than 50% above mid-June levels.
This growing stress in the diesel market underscores a broader challenge for oil traders. Even if crude exports from the Gulf partially recover, refining systems remain under acute strain. A reopening of Hormuz may improve crude availability, but it will not quickly resolve shortages of fuels that power much of the world’s freight, manufacturing and agriculture.
XLE•
