Market fluctuations in the oil sector have intensified as geopolitical tensions in the Middle East have flared up once again.

Key Price Movements

In terms of absolute prices, the situation in the Middle East has become volatile once more. An Iranian attack on a tanker transiting the Strait of Hormuz prompted a retaliatory response from the United States, pushing up geopolitical risk premiums. As of Friday's close, the front-month Brent crude contract for September settled at $76 per barrel. The front-month WTI crude contract for August settled at $71.41 per barrel, while the front-month Dubai crude contract for September closed at $69.5 per barrel.

Regarding monthly spreads, the three major benchmark crude spreads saw a modest rebound, though the overall trend remains weak. The Brent M1-M2 spread recovered to -$0.02 per barrel, while the WTI M1-M2 spread stood at $0.07 per barrel. The Dubai M1-M2 spread recovered to -$1.54 per barrel. Dubai crude, being the benchmark most directly impacted by Strait of Hormuz disruptions, remains under pressure not only from short-term floating storage supply but also due to aggressive spot crude sales by producing nations through competitive tenders.

Forward Curve and Regional Differentials

Looking at the forward curve, front-end contango has eased. The Brent forward curve has shifted to a flat structure. WTI remains relatively stronger, with its entire curve maintaining a backwardation structure, although front-end premiums have declined significantly.

In regional differentials, the front-month Brent-Dubai EFS spread remains low at $4.11 per barrel. The WTI-Brent front-month spread widened to -$3.8 per barrel. The weakness in Dubai relative to Brent, and Brent relative to WTI, has effectively closed arbitrage windows between East and West and across the Atlantic, leading to a notable decline in U.S. crude exports.

Physical Market Weakness

Physical discounts for North Sea benchmark crudes like BFOET remain weak, with Forties and BNB crude discounts still in negative territory. West African crude discounts continue to fall, with some grades even showing discounts exceeding -$10 per barrel. While Middle Eastern crude discounts have seen some recovery, they remain soft. North American crude discounts are holding up reasonably well, supported by low inventories, whereas Latin American crude discounts are also subdued. The physical market's weakness is comparable to levels seen in 2020, with no significant recovery observed in Chinese physical buying interest.

Refined Product Crack Spreads

Regarding refined product crack spreads, diesel and jet fuel cracks have strengthened recently, influenced by reduced diesel exports following attacks on Russian refineries. Gasoline cracks remain robust. Global refining capacity constraints continue to limit product supply.

Global Inventory Trends

According to Kpler's high-frequency inventory data, global seaborne and onshore crude oil inventories (excluding China and U.S. Strategic Petroleum Reserve stocks) have recently rebounded rapidly to 3.115 billion barrels. This increase is primarily due to floating storage in the Persian Gulf being converted into cargoes in transit. Onshore crude inventory levels remain low at 1.76 billion barrels. For floating storage, total seaborne crude inventories (including floating storage) have risen to 1.35 billion barrels, while dedicated floating storage has decreased to around 90 million barrels. This decline is mainly due to the rapid drawdown of Persian Gulf floating storage; with the clearance of backed-up tankers, Persian Gulf floating storage has returned to pre-conflict levels. China's onshore crude inventories have recently declined to approximately 1.18 billion barrels (satellite-measured floating roof tank stocks, excluding underground SPR). The pace of inventory drawdown has accelerated, as Chinese crude arrivals have fallen to 6 million barrels per day and continue on a downward trajectory. Uncertainty surrounding Strait of Hormuz shipping resumption, coupled with high freight rates, means China remains in a phase of prioritizing inventory drawdown.

Refinery Maintenance and Geopolitics

As of the week ending July 10, total global refinery outages were estimated at approximately 10.6 million barrels per day. New outages in China and Russia kept outage volumes elevated, though this was partially offset by ongoing recoveries in the Middle East and high utilization rates in the U.S. and Europe. For the week ending July 17, outage levels are projected to decrease to about 9.8 million barrels per day, supported by restarts in Asia, expected recovery in Russia despite new attacks, and completed maintenance in Canada. In the week ending July 10, Russian refinery outage capacity rose to about 4.3 million barrels per day, up from the prior week's average of 4.14 million barrels per day. Recent drone attacks have impacted several facilities. Outages at major refineries including Slavneft, Moscow, Tuapse, Kirishi, Astrakhan, Volgograd, Ryazan, TANECO, and Kuybyshev persist, keeping overall outage capacity high. In Kazakhstan, the Atyrau refinery is recovering from maintenance, while the Komsomolsk refinery is scheduled to restart next week, which should aid fuel shipments to Khabarovsk. Despite some capacity returning, outage capacity is still expected to remain around 4.4 million barrels per day as of July 17. In the Middle East, average refinery outage capacity is about 550,000 barrels per day, reflecting a normalization of operations as several facilities ramp up processing following security-related supply reductions. With continued improvements in shipping through the Strait of Hormuz, the region's total outage capacity is forecast to drop to approximately 416,000 barrels per day by July 17.

Geopolitically, Middle East tensions have resurfaced. Iran's attack on a vessel transiting the Oman shipping lane in the Strait of Hormuz has reduced the number of transiting tankers, with some vessels resuming 'dark' operations. In the Russia-Ukraine conflict, damage to Russian refineries has intensified further. Russian crude oil exports continue to increase, while its refined product exports keep declining.

Overall Outlook and Strategy

While absolute prices have rebounded due to geopolitical developments, there are no signs of improvement in the physical market. The divergence between paper and physical markets is widening, which will constrain any further upside for oil prices. Concurrently, Iranian disruptions in the Strait of Hormuz will continue to delay the recovery pace of Chinese demand. Any relaxation in refined product export controls will also be further postponed. In the near term, oil prices are expected to enter a phase of consolidation.

The primary trading strategy reflects the resurgent Middle East tensions and uncertain Strait of Hormuz shipping conditions, pointing to near-term price volatility for crude oil.

Key Market Risks

Downside risks include a de-escalation of conflict in the Middle East and a global economic crisis triggered by persistent high inflation.

Upside risks encompass a resumption of hostilities between the U.S. and Iran, and a decline in global petroleum inventories to critical levels, potentially triggering a tangible supply shortage.