Huatai Futures: Strait reopening remains uncertain, demand destruction in progress

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Source: Huatai Futures

Author: Kang Yuaning

Market Analysis

Price Spread: In terms of absolute prices, affected by Middle East tensions, oil prices remain volatile at high levels. As of the latest close, Brent crude oil front-month price (June) closed at $109 per barrel, WTI front-month contract (May) rose to $115.54 per barrel, Dubai crude front-month price (June) closed at $120 per barrel.

Regarding the month spread, the three major benchmark oils show strong performance, with very high near-month premiums. WTI, due to May contracts still trading, has a stronger near-month premium than Brent, with M1-M2 spread at $14 per barrel. Brent, since the near-month contract has shifted to June, has an M1-M2 spread of $9.6 per barrel. Dubai’s supply loss is the largest, with the month spread among the three benchmarks being the strongest, M1-M2 at $18 per barrel. For the forward curve, due to the prolonged Strait disruption beyond expectations, the smile curve has disappeared, shifting to a full curve with near-month premium.

Regionally, Brent Dubai EFS front-month spread has risen to $16 per barrel and remains strong, with the WTI-Brent front-month spread holding at $11 per barrel. Relative to others, Brent outperforms Dubai and WTI.

In terms of physical discounts, spot discounts in North Sea, West Africa, Mediterranean, Latin America, and other regions continue to surge. Due to Middle Eastern supply disruptions, Asian buyers’ global procurement has led to significant spillover of Middle Eastern shortages. WTI CIF North Sea discounts have soared to $17 per barrel, pushing Dated Brent prices last week to $140 per barrel. Recent discounts have increased sharply compared to premiums, reflecting current spot market shortages. Absolute prices are still influenced by developments in Middle East tensions.

Refined Product Crack Spreads: Middle distillates remain most affected by Strait disruptions. European jet fuel crack has surged to $110 per barrel, diesel crack to $70 per barrel, Singapore jet fuel and diesel crack spreads have risen to $70 per barrel, with diesel spot premiums soaring to nearly $80 per barrel. Naphtha crack spreads have not shown significant increases, but Singapore spot premiums have surged to $300 per barrel. Disruptions in Middle Eastern exports have caused major shocks to trade flows of naphtha, jet fuel, and diesel, also impacting fuel oil and gasoline structurally.

Inventories: According to high-frequency Kpler data, global seaborne and land crude oil inventories (excluding China and US SPR stocks) have continued to decline since March, down to 2.89 billion barrels, a decrease of 150 million barrels from late February. Absolute inventory levels are at their lowest in five years, mainly due to rapid depletion of seaborne inventories, with land inventories down by 45 million barrels. China’s land crude stocks have recently stabilized at 1.2 billion barrels (excluding underground SPR). Inventory drawdown is relatively slow; with Middle Eastern arrivals (excluding Iran) already interrupted, if commercial reserves are drawn down, inventories are likely to decline faster in the future, though refineries may reduce throughput to slow consumption (Sinopec has cut capacity by 5%). Regarding floating storage, recent rapid consumption has reduced seaborne inventories from 1.25 billion to 1.16 billion barrels, with floating stock rising from less than 100 million to 187 million barrels, mainly reflecting significant Middle Eastern trade disruptions and ships stranded in the Strait of Hormuz. Regarding sanctions oil, the US has lifted sanctions on Russia and Iran, with recent declines in Russian crude in transit and floating stocks, mainly due to increased Indian procurement. Seaborne Russian stocks have decreased from 140 million to 100 million barrels, while Iranian seaborne stocks have not declined significantly.

Oil Tanker Schedules: Due to the Strait of Hormuz blockade, most Middle Eastern crude shipments are halted. Currently, only Oman exports normally; other exports via the Strait are interrupted (Iran’s exports are normal). Saudi Arabia has significantly increased crude exports from the West Coast’s Yanbu terminal, which has surged from 700k barrels/day pre-war to 3.8 million barrels/day. If fully utilizing this terminal’s capacity, the maximum could reach 4.5 million barrels/day, and exports are already close to this. The UAE can bypass the Strait via the Abu Dhabi pipeline to the Fujeirah port, which has increased exports to 1.8 million barrels/day, though multiple attacks on the port since the conflict began have affected unloading efficiency. Iraq plans to increase northern exports via the Iraq-Turkey pipeline from the Jeyhan terminal. Russia’s exports remain at 3.5 million barrels/day, with Far East shipments steady at 1.3 million barrels/day; western port shipments have slightly declined recently due to attacks on Primorsk and Ust-Luga. After the CPC terminal resumed operations, exports increased from 1 million to 1.8 million barrels/day, surpassing pre-attack levels. North African exports from Algeria and Libya remain normal.

In Latin America, overall crude exports are slightly down to 6 million barrels/day. Brazil’s exports have not yet recovered to late last year’s high levels, currently around 2 million barrels/day. US crude exports remain at 4 million barrels/day, with significant increases in refined product exports. Mexico’s crude exports stay at 0.5 million barrels/day, Venezuela’s exports have surged to 1 million barrels/day, shifting from China to the US, Europe, and India. Guyana’s exports remain at 0.9 million barrels/day. Regarding arrivals, Northeast Asia’s crude arrivals last week sharply declined to 700k barrels/day, Southeast Asia to 13M barrels/day, South Asia to 2.6M barrels/day but stabilized. Due to Middle Eastern disruptions, Northeast Asian arrivals are expected to drop significantly. US crude arrivals have steadily increased since the start of the year to 2.7 million barrels/day, mainly due to increased Venezuelan imports. European arrivals slightly increased to 9.4 million barrels/day.

Refinery Maintenance and Profits: Global refinery shutdowns are estimated to reach 8.5 million barrels/day this week, down about 0.5 million barrels/day from last week. This decline is mainly due to large-scale restart in China after maintenance, significant recovery in Europe and the US, and unexpected outages in Latin America. As of the week ending April 10, with about 1.4 million barrels/day of capacity restored, shutdowns are expected to further decrease but remain above 7.1 million barrels/day. The improvement is driven by Asia’s restart wave after maintenance, ongoing capacity recovery in the Middle East and Russia following recent attacks, and additional capacity coming online in Europe and the US. However, since refineries in the Strait of Hormuz cannot export, and outside the strait, refineries face increasing crude shortages, operating rates may decline. Disruptions at Russian refineries are expected to keep total downtime around 1.1 million barrels/day as of the week ending April 3, as ongoing attacks offset ongoing restart efforts. Due to crude shortages, Asian refinery utilization is expected to further decline.

Geopolitical Situation: In the Middle East, the Strait of Hormuz remains blocked, with Iran using the strait and Persian Gulf energy infrastructure as leverage in the war. Trump delayed Iran strike plans to April 7 and opened a negotiation window, but amphibious assault ships and ground forces are being deployed. The situation is at a stage of “fighting while negotiating.” Last week, some Middle Eastern energy infrastructure was attacked but not severely damaged. Iran and Oman are drafting a navigational treaty for the strait. Regarding Russia-Ukraine, Ukraine has recently intensified attacks on Russian oil export terminals and nearby refineries in the Baltic, potentially reducing exports. However, the latest news indicates that Ust-Luga port has resumed normal operations.

Overall Outlook: The Middle East situation remains highly uncertain. The reopening of the strait is still far off with no clear path. Middle Eastern crude arrivals in Asia have already been interrupted. Besides some rerouted crude and ongoing exports from Iran and Oman, short-term balance relies on drawing down inventories, sanctions oil, and refinery throughput reductions. However, the refined product market lacks supply redundancy and is already in demand destruction. Crack spreads are expected to further surge, and physical crude discounts will continue to rise. If the strait remains blocked, physical crude prices could break through $200 per barrel, and refined product prices might exceed $300 per barrel, accelerating demand destruction.

Strategy

Oil prices will remain highly volatile in the short term due to geopolitical influences. Current risks in the crude market are high; it is recommended to use options to hedge risks.

Risks

Downside risk: Easing Middle East tensions, reopening of the strait, or a global economic crisis triggered by energy crises.

Upside risk: Prolonged closure of the Strait of Hormuz beyond expectations.

Investment Advisory Qualification: Securities Permit [2011] No. 1289

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