Oil Narrative

Market Overview

Physical crude and freight push to extremes

Oil Narrative

The market continues to debate whether the flows ex the Strait of Hormuz have returned to pre-war levels.

Flatprice followed the narrative but physical markets in the form of DFL and medium crude diffs reacted more violently, particularly with the shutdown of the Saudi E/W pipeline that occurred on 11 September after the drone attacks from Iraq.

The dirty freight markets also continued a dizzying upward ascent to take a large percentage of the delivered costs to Asian refineries, with Ras Tanura to Ningbo price increasing from 15$/bbl in early August to a whopping 33$/bbl by the end of September. At the start of the year, this was only 4$/bbl.

Refining margins have got to be positive

Oil Narrative

With the volatile upward swing in freight costs, the delivered cost of crude becomes so much more expensive for Asian refineries. Product cracks did make some upward move but they were not enough to offset a negative margin picture basis the November cracks.

In this equation, crude FOB diffs needed to correct further to still deliver at least a breakeven margin for the medium refinery configuration. We saw this dynamic played out on the AG crude FOB diffs, particularly on Oman.

The expectation remains that Asian medium refining margin must be greater or at least zero in the October trading window for December barrels, and if freight remains elevated, product cracks will be next to respond after crude FOBs have done the heavy lifting in September.

China remains the wild card as it is holding back on product export quota decisions in early October.

China buying crude but holds back on product exports

Oil Narrative

China still has the appetite to buy crude to run their refining kits. China has bought Arab Light, Arab Medium and Khafji from several Saudi Aramco tenders in September and will likely continue that path if the price is favourable.

The third batch of import quota was announced, matching the annual ceiling for 2026 but this is only for independent refineries which will struggle to find economic feedstock.

The independent refineries have lost Venezuelan barrels at the start of the year, competing with more expensive Russian barrels with Indian and with their own state-owned refineries and finding Iranian barrels down to a trickle.

Product export quotas are mainly for the state-owned refineries (except for Zhejiang Petrochemical), and the October quotas were held back till after the Golden Week holidays but signaling Beijing’s cautious stance on the continuous flow of crudes from the Middle East amidst wider tanker and infrastructure attacks.

This results in a strengthening diesel E/W, overlaid with the EU SPR release as well.