Oil Narrative
Market Overview
Flat price has reacted swiftly to the reopening of the Strait of Hormuz, even if the flow remains well below pre-war levels and is not representative of sustainable production.
Time spreads: Dubai deep contango, Brent weak contango, WTI spreads in backwardation.
Markets would remain sanguine until there is another big supply shock as the SPR cushion is gone.
Replenishment of SPR will take longer than commercial stocks as dependent on government tenders and flat price.
Singapore naphtha, mogas, middle distillates and fuel oil in backwardation.
Product cracks are healthy and still subject to recovery of AG refinery product exports.
Eastern cracks more downside risks compared to the Atlantic Basin that is now facing low product inventory levels and Russian refining loss.
China is the key factor to watch if they resume exporting more refined products.
Lack of newbuilds in 2026 coupled with refinery closures in the US means little incremental refining capacity globally sans China.
During Iran war, USGC products were exported aggressively into Asia and Europe, leading to low inventories to start the peak summer demand.
More downside risks to inability for Western refineries to deliver expected products (heatwaves, unplanned shutdowns, drone attacks on Russian kits).
USGC refiners continue to be advantaged as they are less exposed to volatile dirty freight rates.
Eastern refineries are likely to operate at higher runrates as confidence in the SoH reopening sustainably returns, but may position conservatively to avoid sudden loss of feedstock.
Restocking
If cash diffs fall off a cliff while time spreads stay flattish, companies should top up commercial inventory to normal operating levels.
Where working capital costs are low, some may increase operating levels higher as a buffer against another potential Strait of Hormuz closure
A structural contango would bring traders back to the storage game.
First to be filled are onshore tank.
A deep contango needed to incentivise floating econs.
● IEA members must hold 90 days of emergency stocks.
●Timing and method of refill is left to each country.
Phase 1
● A rush to refill in the next quarter looks unlikely.
● China is the exception, quicker to react to lower flat price.
● More refills than the actual release given more interest to keep higher stocks (India, Australia, NZ, ASEAN).
Phase 3
● Refills happen via government tenders.
● Crude comes first: products remain relatively short.
● SPR buying is flat-price driven and needs budget approval.
Phase 2
