The 60-day US-Iran negotiation window expired on August 17th without a breakthrough, leaving crude prices highly volatile as they oscillate between geopolitical risk premiums and diplomatic expectations. While August replacement flows have failed to show a significant recovery, with Yanbu port loadings continuing to decline, state-owned giants like Saudi Aramco and ADNOC are actively offering crude to Asian refiners via ship-to-ship transfers outside the Strait of Hormuz, accompanied by a flurry of tenders. Asian buyers are aggressively diversifying sources—Chinese firms are snapping up October-loading Russian ESPO, India is heavily tendering for West African grades, and Japan and South Korea are pivoting towards US cargoes. This shift is gradually moving inventories from floating storage to onshore tanks across the region, tightening the physical market. With the strait still closed and negotiations stalled, we maintain a price range of $85-97 per barrel.

Geopolitics: Bullish

The 60-day memorandum expired without a new agreement on August 17th. In response, former President Trump announced what he termed the "harshest economic actions" on August 19th, shifting from military pressure to economic strangulation by targeting Iran's financial, commercial, and shipping networks, effectively halting its crude exports. Iran, in turn, has signaled a shift from defense to offense, threatening to expand its range of attacks, leaving both the strait's navigability and the nuclear issue deadlocked.

Supply: Neutral

While visible flows through the strait have decreased, alternative routes are seeing increased activity, keeping overall supply balances neutral.

Demand: Neutral

Asian nations are actively seeking alternative sources. China's crude imports are rebounding, with refiners purchasing millions of barrels of Saudi medium crude via tenders and term contracts.

Basis/Monthly Spreads: Neutral

Dubai's front-month spread has hit record highs, reflecting increased demand for Middle Eastern barrels.

Crack Spreads: Bullish

Diesel cracks have surged to record levels. Strong refining margins continue to support processing demand and provide a solid price floor for crude.

Inventories: Neutral

EIA data shows a build in total US crude stocks, but Cushing inventories fell and the SPR dropped to new lows. Global inventories remain low, with no signs of a substantial loosening in the stock picture.

Escalating Gulf Tensions

On August 13th, indirect US-Iran talks remained deadlocked as the memorandum deadline approached. Iran insisted that the US must first lift sanctions before it would reopen the strait, with the market fearing a breakdown in talks, providing geopolitical support for oil prices. The memorandum officially expired on August 17th after mediation by Qatar and Oman failed, closing the negotiation window without any large-scale military conflict breaking out. The July FOMC minutes released on August 18th highlighted the Iran conflict as a significant upside risk to inflation, raising expectations for a September rate hike and strengthening the US dollar, which capped price gains. Oil tankers continue to reroute via the safer Omani side, but the recovery in strait transit volumes is limited. The risk of proxy conflicts in the Middle East persists, keeping the market in a tug-of-war between macro factors and geopolitical risks.

Declining Visible Flows Through the Strait of Hormuz

Logistics monitoring for the week ending August 20, 2026, shows that only 39 liquid-carrying vessels transited the Strait of Hormuz, of which just 5 were tankers. The daily average of tanker transits was 1 vessel, carrying an average of 1.58 million barrels per day of crude and condensate, a dramatic drop from the pre-conflict average of 15 million barrels per day. With the June memorandum expired and no new framework in place, large tanker transits remain at a standstill.

Bab el-Mandeb Strait Traffic Remains Stable

In the week ending August 20, 2026, 101 liquid-carrying vessels passed through the Bab el-Mandeb Strait, including 29 tankers, 6 of which had their AIS signals switched off. Daily tanker transits averaged 4 vessels, with daily crude flows of 3.87 million barrels (compared to 2.66 million pre-conflict and 6.88 million during the MoU period). While total vessel traffic is stable, the composition of tanker flows is diverging: international tankers transit normally, while Saudi-affiliated tankers continue to take the long route around the Cape of Good Hope. Although there have been no large-scale attacks on shipping in the Red Sea, the persistent risk of long-range anti-ship missiles continues to underpin a geopolitical premium in oil prices.

Replacement Flows Show Modest Improvement

Loadings at Yanbu port held steady at 1.24 million barrels per day for the week ending August 20, up 130,000 barrels from the previous week. However, rising freight costs from the Mediterranean to Asia have prompted some Chinese refineries to cancel Yanbu loadings for August. Fujairah loadings recovered to 2.12 million barrels per day, an increase of 170,000 barrels week-on-week, while STS loadings in Oman averaged 1.23 million barrels per day, a decrease of 690,000 barrels from the prior week. In total, alternative flows now amount to 4.58 million barrels per day, down 390,000 barrels week-on-week.

Yanbu Port Loadings Decline

Saudi loadings at Yanbu continue, but the route has shifted from heading south through the Bab el-Mandeb to heading north towards the Sumed pipeline and the Suez Canal. In the week ending August 20, 2026, average weekly exports of crude and condensate through the Bab el-Mandeb were 2.63 million barrels per day, with Saudi-origin cargoes accounting for 400,000 barrels per day. Egyptian Sidi Kerir exports are increasing, hitting 1.53 million and 640,000 barrels per day respectively this week. The increment is primarily from Saudi supply, while volumes destined for Asia are decreasing.

Buffer Stocks Nearly Depleted, SPR Release Capacity Diminished

Global crude inventories have fallen by a total of 341 million barrels since the conflict began. At the onset, the world had about 400 million barrels of spare commercial crude. After a brief build in June, destocking resumed in July, driven by weaker Chinese imports. Only the Middle East has seen passive builds due to export blockages, which cannot offset the global drawdown. The IEA's pledged release of 430 million barrels from strategic reserves is about 70% deployed. Although over 1 billion barrels of government-controlled stocks appear available, the actually usable volume is severely diminished. US SPR inventories have fallen to their lowest since 1983, at around 304 million barrels. After falling below 320 million barrels, the daily release rate in August has slowed to 550,000-600,000 barrels per day, well below the over 1 million barrels per day seen in May and June.

Southeast Asian Import Data Confirms Partial Recovery of Direct Gulf Supply

Indonesia's June crude imports nearly doubled year-on-year, rebounding sharply from May, indicating higher refinery intake. Japan and South Korea have increased purchases of US crude to hedge against Middle East supply risks. Indonesia's Pertamina has tendered for cargoes arriving in September-October, and Brunei has cut official selling prices for its July-loading Seria Light and Champion grades. Data from six Southeast Asian countries confirms that after the acute phase of the Hormuz crisis, direct Gulf supply is showing signs of recovery, not a complete permanent shift to diverted routes, although diverted cargoes still account for a significant proportion.

Middle East Crude Discounts Rebound

Iranian supply has been cut off, as confirmed by the central bank governor that exports have completely stopped due to the US naval blockade. Chinese independent refineries report "no offers" for Iranian crude arriving in September-October, removing approximately 1-1.5 million barrels per day of sour crude from the Middle East supply. ADNOC has issued its ninth round of spot tenders since the war began, with buyers like India's MRPL actively participating. In the Dubai MOC, Unipec has been consistently selling partials to Mercuria, ultimately converging into physical delivery, reflecting buyers like Mercuria actively chasing cargoes in the MOC. Saudi Arabia's significant OSP cuts have paradoxically stimulated purchases: August's Arab Light discount to Asia of $1.50 and September's further $2 discount are enticing Asian refiners to increase Middle East crude procurement, unleashing concentrated physical demand. Chinese refiners are also urgently restocking, with Shandong independent refinery inventories at an 8-month low, with tanks "almost empty".

Chinese Refiners Secure October ESPO Cargoes

Driven by geopolitical risks in Middle East shipping, low freight rates for short hauls, and the suitability of light sweet crude for Q4 product demand, Chinese refiners are aggressively booking October-loading ESPO to lock in stable, low-cost feedstock. Kozmino port in Russia's Far East plans to load 42 ESPO cargoes in October, each around 100,000 tons (740,000 barrels), totaling approximately 31.08 million barrels. Of these 42 cargoes, 30 (71%) have been fully secured by Chinese refiners, leaving only 12 parcels for spot sale, with some traders' offers rising to Brent + $2 per barrel DES Shandong.

Japan and South Korea Shift Towards US Crude

Japan's July crude imports from the US surged 814.5% year-on-year to 891,000 barrels per day, a record high since 1979. US crude now accounts for 36.3% of Japan's total imports. ENEOS has stated that US crude is the "most practical choice" for diversification outside the Middle East. South Korean refiners have purchased November-loading WTI Midland, with an additional 3 million barrels of WTI Midland/WTL sold to Korea.

West African Crude Demand Cools Due to Soaring Freight

Shipping risks in the Red Sea and Hormuz have reduced Russian crude procurement. New Indian refinery capacity has increased demand for light sweet crude, and with no large strategic reserves, India relies on flexible spot tenders to hedge supply risks. West African tender volumes surged 65% year-on-year in July-August. From July 1st to August 12th, over 16 million barrels of West African tenders were concluded, all arriving in September. However, soaring freight rates are pressuring the FOB market. A large portion of Nigeria's September-loading barrels remain unsold, with Forcados/Escravos offers falling to around a $5 per barrel premium, down at least $1 from last week.

China's Seaborne Imports Rebound in July

Saudi Aramco has sold at least 4 million barrels of crude to two Chinese refiners, loaded outside the Strait of Hormuz and transferred via ship-to-ship (STS) operations near Fujairah port in the UAE. These cargoes consist of Arab Medium and Arab Heavy grades. PetroChina and Sinochem each purchased 2 million barrels of the heavier Saudi crude at a premium.

Chinese Refinery Runs and Throughput Recover

Refinery operating rates and crude processing volumes in China are on the rise, supporting overall demand.

US EIA: Higher Crude Runs, SPR at New Lows

The latest EIA weekly report shows US commercial crude inventories increased by a substantial 4.4 million barrels, significantly beating market expectations, yet prices did not come under pressure. Driven by strong crack spreads, US refinery throughput rose to its highest level since September 2019, with utilization at 97.2%. Extreme product tightness is forcing refineries to consume crude at full tilt. Despite the overall build in crude stocks, Cushing inventories fell by 1.3 million barrels. With US refining units operating near full capacity, there is very limited room for further output increases.

Product Markets Show Strong Cracks

Refined product cracks are strengthening, and product scarcity is becoming more pronounced, indicating robust underlying demand.

Speculative Positioning at Low Ratio

In the week ending August 11, 2026, Brent saw significant additions to speculative longs while shorts exited, indicating a notable rise in speculative bullish sentiment. For WTI, longs increased slightly, but short positions expanded faster, pulling net length down, suggesting speculative caution.