Core View Summary

The core outlook for Brent crude is a range of Brt80-95. The escalation of geopolitical tensions means the futures curve (fp) needs to incorporate a risk premium. The ultimate height of this premium depends on the intensity and duration of the conflict between the US and Iran. Last week, the US-Iran situation escalated with the Houthis joining the fray. However, the situation cooled over the weekend as the US paused attacks and a third-party nation stepped in to mediate talks. This week, the market's focus will be on whether the peace talks are effective and if the anticipated short-term ceasefire materializes.

The disruption caused by the Houthis in the Red Sea has a direct impact on Saudi Arabia, which now needs to consider alternative transshipment routes. Previously, following the blockage of the Strait of Hormuz (SoH), Saudi Arabia redirected at least 3.5 million barrels per day (bpd) via its East-West Pipeline to the Yanbu port. From there, it was shipped south through the Bab el-Mandeb Strait to Asia. However, after the Houthi attack on a Saudi tanker, traffic through the Bab el-Mandeb Strait plummeted from 3.5 million bpd to approximately 1.5 million bpd. Three main alternative routes exist. First, tankers could head north through the Suez Canal and around Africa, adding 20-30 days to the journey, though fully loaded VLCCs cannot pass through the Suez Canal. Second, oil could be sent via the SUMED pipeline to the Mediterranean and then reloaded onto tankers, with a capacity of around 0.8 million bpd. Third, the Israeli pipeline is an option, but its feasibility depends on Saudi-Israel relations, and it currently has no actual flow capacity. Other conventional alternative channels have seen significant increases. Last week, exports from the port of Fujairah surged past 3 million bpd, while ship-to-ship (STS) transfers fell to 2 million bpd. Overall, while arrivals in major Asian countries in July benefited from a month-on-month increase of 1.76 million bpd in June loadings, the re-imposition of the blockade has led to a month-on-month decline of 6.12 million bpd in July loadings to 10.47 million bpd. With overall inventories still low, arrivals are expected to fall sharply after September. This tightening feedstock supply makes previous expectations for higher refinery runs highly likely to be disappointed.

Geopolitical Escalation and Cooling, Houthis Enter the Fray

After Brent crude's September contract broke above $100 per barrel, we observed President Trump's pressure index returning to its second-highest level in May. Simultaneously, reports of peace mediation efforts by third-party nations, such as Pakistan, are increasing, making it more probable that President Trump will call for a de-escalation (a "taco"). On Friday evening, the US paused its strikes on Iran, and Iran subsequently indicated it would also cease attacks over the weekend. Both sides may be considering renewed negotiations with the assistance of a third-party country.

In the third week of the dual blockade of the Strait of Hormuz (SoH) by the US and Iran, traffic has fallen to nearly zero, although STS transfer channels still maintain a certain volume. News of Iranian attacks on commercial vessels remains frequent, suggesting this blockade is less stringent than the previous one, with more tankers taking the risk of transiting the strait.

A total of approximately 5 million bpd has been redirected via Fujairah and STS transfers. Last week, crude oil export volumes from the Fujairah port grew to 3 million bpd, while volumes of STS transfers exiting the SoH fell to about 2 million bpd.

Houthi attacks on the Bab el-Mandeb Strait have accelerated the development of alternative routes. Last week, Houthi forces in the Red Sea region attacked at least two Saudi oil tankers, forcing Saudi Arabia to consider rerouting crude oil exported from Yanbu port via its East-West Pipeline. Following the SoH blockade, crude oil exports from Yanbu port surged from 50,000 bpd to approximately 4 million bpd, becoming a relatively stable alternative export route for Saudi Arabia. Under normal conditions, oil loaded at Yanbu would transit south through the Bab el-Mandeb Strait into the Gulf of Aden and onward to East Asia via the Indian Ocean. However, after the Houthi attacks, traffic through the Bab el-Mandeb Strait dropped from 3.5 million bpd to around 1.5 million bpd. The remaining volume is mainly routed northwards through the Suez Canal and around the Cape of Good Hope, or transferred northwards via the SUMED pipeline. The limiting factors are that VLCCs cannot transit the Suez Canal, and the SUMED pipeline's one-way capacity may be limited to around 800,000 bpd. This means these alternatives may not fully cover the previous flow volumes, and the northern rerouting to Asia would add an extra 20-30 days of sailing time.

Tightening Feedstock Supply Ahead

Global onshore tank inventories remain at historically low levels. A portion of the volume currently in transit, scheduled to arrive in August, will be transferred to onshore storage. Considering the use of tankers as floating storage within the Gulf and the increase in Red Sea diversions, which extends sailing times, the volume of floating storage is expected to remain high.

The feedstock supply for major Asian countries is tightening again. In June, when the strait was open, total shipments to China, Japan, South Korea, and India increased by 1.76 million bpd month-on-month to 16.6 million bpd. This volume was concentrated for arrival in July. However, with the strait re-blockaded in July, the volume currently being loaded has decreased by 6.12 million bpd month-on-month to 10.47 million bpd. This will lead to a significant decline in overall arrivals after September, tightening feedstock supply once more.

Expectations for higher refinery runs are likely to be disappointed. With inventory levels remaining low, the subsequent expectations for increasing refinery run rates may fall short, returning to a low-operating-rate environment.

Structural Data Update

Timespreads have strengthened. As of July 24, the WTI front-month spread closed at $4.16, with the second-to-third month spread at $3.42. The Brent front-month spread closed at $5.1, with the second-to-third month spread at $3.61. The Shanghai INE SC front-month spread closed at -¥4.6.

Product cracks remain at high levels.

Brent net long positions have rebounded. In the week ending July 21, Brent fund managers increased long positions by 3,604 contracts and reduced short positions by 16,720 contracts, resulting in a net long increase of 20,324 contracts.

WTI net long positions continue to decline. In the week ending July 21, WTI fund managers increased long positions by 6,308 contracts and increased short positions by 4,303 contracts, resulting in a net long increase of 2,005 contracts.