Market prices and spreads: Triggered by escalating Middle East tensions and the attack on Saudi Arabia's East-West pipeline, crude oil prices surged past the $100 mark last week. By Friday's close, the front-month Brent contract (November) settled at $104.61 per barrel, WTI's front-month (October) closed at $100.05 per barrel, and Dubai's front-month (November) finished at $123.66 per barrel.
In the term structure, the spreads for all three benchmark crudes accelerated their rebound. The Dubai M1-M2 spread continued its surge, climbing back to $28.40 per barrel, while the Brent M1-M2 spread recovered to $4.83 per barrel and WTI's M1-M2 spread firmed to $4.11 per barrel. Notably, Dubai's spread witnessed a single-day jump of $10 per barrel this week, underscoring the acute tensions in the Middle East. The pipeline attack, combined with Houthi threats to shipping in the Bab el-Mandeb Strait, has led to a further decline in Chinese crude flows. Additionally, intense bidding among Chinese refiners for ESPO cargoes signals robust buying interest, but with refining margins deeply in the red, the current situation remains unsustainable.
Regional differentials: The front-month Brent-Dubai EFS held relatively steady at $9.14 per barrel, while the WTI-Brent spread widened to $8 per barrel. Overall, inter-regional spreads saw limited movement compared to last week, with no further expansion in the arbitrage economics for US crude exports.
Physical premia: In the North Sea, the BFOETW complex saw its discount surge to $8 per barrel. West African and Latin American grades held broadly steady, with Brazil's Tupi even weakening slightly. Middle Eastern grades, however, posted sharp gains in premiums, with some physical cargoes trading near $30 per barrel. ESPO's premium spiked to $15 per barrel, though some buyers reportedly paid as much as $20 per barrel. Due to supply uncertainty from the Middle East, integrated majors, large-scale refiners, and independent teapots are fiercely competing for ESPO cargoes. At present, the supply of sanctioned crude to teapots has largely dried up, and with domestic fuel price caps preventing product prices from keeping pace with crude gains, lower run rates are inevitable. Integrated refiners may see a more moderate decline due to supply security obligations and export quotas.
Product cracks: European and Singapore diesel cracks surged on Friday, as Houthi attacks on Saudi Arabia continue to threaten diesel exports from the kingdom's west coast. Cracks for other products remained stable.
Inventories: According to Kpler high-frequency data, total global onshore and floating crude inventories have fallen to 4.59 billion barrels, down 400 million barrels since the start of the year, representing a drawdown rate of approximately 3.7 million barrels per day. Excluding China and US SPR, global stocks have held steady at 2.98 billion barrels, a historically elevated level. Global onshore inventories (excluding China and US SPR) are at 1.8 billion barrels, historically low. China's crude inventories continue to decline.
Floating storage: Crude in transit, including floating storage, has declined to 1.16 billion barrels, still historically high. Floating storage alone has dropped to 950 million barrels. With Iranian exports under blockade, Iran's floating inventories continue to be drawn down, with sanctioned crude at sea falling to 220 million barrels and expected to decline further. Within the Persian Gulf, cargoes stranded after the conflict have largely cleared, though inventories have seen a slight build recently. China's onshore crude stocks (satellite-based floating roof tanks, excluding strategic reserves) have fallen to roughly 1.16 billion barrels, below year-ago levels, primarily due to faster refinery run-rate recovery since August, while recent Chinese crude imports have declined again. Given the current high-price, high-freight, high-premium environment, domestic run rates are likely to ease once more.
Crude tanker flows: Since the Houthis declared a blockade of the Bab el-Mandeb, visible traffic through the strait has dropped significantly, down about 40% from pre-July 20 levels. Some tankers are transiting dark, while others have rerouted to the northern route. AIS signals show Saudi west coast loadings sharply lower, though this may not reflect actual export declines but rather the deliberate shutdown of transponders to avoid Houthi attacks. Recent arrivals and loadings at Egypt's Ain Sokhna and Sidi Kerir (the two termini of the SUMED pipeline) have fallen from two-week highs, with fewer Saudi diversions. Last week's attack on the East-West pipeline has forced its closure; the duration remains unclear, and a prolonged shutdown would sharply reduce west coast exports and refinery throughput. Additionally, attacks on the Jazan refinery have led to a marked decline in Saudi diesel exports.
Russian crude loadings held steady at 3.8 million barrels per day, though diesel exports remain depressed due to the export ban. CPC crude loadings have recovered to high levels. Chinese crude arrivals continue to decline, while product exports hit new highs, particularly diesel and jet fuel, which are now above year-ago levels.
Refinery maintenance: Global refinery outages this week total approximately 11 million barrels per day, with North America contributing most of the weekly increase as Canada's autumn maintenance cycle kicks off and US outages remain elevated. Additional outages came from Russia, where new attacks partially reversed recent recovery momentum, and Japan, which added new maintenance. Chinese restarts following maintenance partially offset the Asian increase. Meanwhile, Middle East capacity continues to recover gradually from earlier attack-related disruptions. However, export restrictions in the Strait of Hormuz and recent strikes on Saudi Arabia's Jazan refinery will constrain improvements in regional run rates.
Looking ahead, total global outages are expected to ease only marginally to 10.9 million barrels per day in the week ending September 18, with further restarts in China and East Asia and gradual Middle East recovery largely offset by new Russian outages following recent attacks. For the week ending September 11, Russian refinery shutdowns are estimated at 4.15 million barrels per day. A Ukrainian drone strike on the Saratov refinery on the night of September 11 caused a fire and suspended product sales, while the Ryazan refinery has been offline since September 6. These disruptions are partially offset by ongoing restarts elsewhere. At the Samara hub, the Novokuibyshev refinery has returned to normal operations, Kuibyshev continues a slow recovery at reduced rates, and Orsk has partially restarted at low utilization. Despite an August 28 attack, the Yanos refinery remains at full capacity. These restarts help offset Ryazan's additional losses, but several refineries, including Kirishi, Volgograd, Tuapse, and Syzran, remain shut. The full impact of Saratov and Ryazan outages will be more apparent next week, with Russian outages expected to rise to 4.35 million barrels per day for the week ending September 18.
Middle East refinery outages are estimated at approximately 1.3 million barrels per day for the week ending September 11. Recent export activity offers early signs of operational improvement: Sitra shipped products on September 10, the first time since January, though the facility remains severely damaged. Jazan remains offline following renewed strikes on September 7-8, adding uncertainty to its recovery outlook, while SATORP continues to operate at around 70% capacity. Kuwait's Mina al-Ahmadi, Mina Abdullah, and Al-Zour continue to run at reduced rates, and Lavan is operating at roughly half capacity. Banias remains in planned maintenance, reportedly ahead of schedule. Gradual capacity restoration is expected to push regional outages slightly lower next week, to around 1.2 million barrels per day by September 18.
Geopolitics: In the Russia-Ukraine theater, Ukrainian drones continue to target Russian refineries and port facilities, hampering restart efforts and keeping run rates low. In the Middle East, the Strait of Hormuz remains tense with dark tanker traffic declining sharply. Recent Houthi attacks have heightened navigation risks in the Bab el-Mandeb and threatened Saudi pipelines, refineries, and ports. Meanwhile, Gulf states are scheduled to discuss the Hormuz situation and transit conditions on Monday; it remains unclear whether the meeting will cool tensions.
Overall assessment: As noted in previous reports, the market's current "triple-high" conditions (high prices, high freight, and high premiums) have begun to suppress demand, and we believe this logic remains intact. With oil prices soaring, refining margins for Chinese and Asia-Pacific refiners have turned negative, and future run rates are set to fall sharply—whether driven by feedstock shortages or poor profitability. On the other side of the scale, geopolitical supply shocks continue to intensify, with flows through Hormuz and Bab el-Mandeb under sustained pressure and the East-West pipeline attack adding fuel to the fire. Going forward, the market will focus on the outcome of Gulf state meetings and the duration of the pipeline closure. Given the demand-side negative feedback loop, we remain cautious on the upside for oil prices.
Strategy: Geopolitics and sentiment could push prices higher in the short term, but demand-side negative feedback cannot sustain high prices. Consider shorting on strength while buying call options as downside protection.
Risks: Downside risks include a de-escalation of Middle East conflict, reopening of straits, and a global economic crisis. Upside risks include a stronger-than-expected Chinese demand recovery and further deterioration in the Red Sea and Middle East situation.
Investment Consulting Qualification: Securities Regulatory Commission License [2011] No. 1289
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