Israel’s attack on Iran, in the early hours of 13 June, resulted in a jump in global oil benchmarks, as the conflict threatened to engulf oil facilities in the Mideast Gulf and the Mediterranean. The market reaction echoed September 2019 – when drones and missiles attacked Saudi Arabia’s key Abqaiq crude processing facility – and also reflected long-running fears that an uncontrolled conflict could affect crude flows through the Straits of Hormuz.
But gains by the Middle East’s Gulf’s key medium sour benchmark, Dubai, have lagged upticks by benchmarks in other regions. Dubai jumped by 6% during 12-16 Jun, but was outperformed by both Brent and WTI futures, which gained 6.91-7.71% in the same period. Brent outpacing Dubai resulted in the Brent-Dubai EFS spread widening from US$1.87/b to US$3.01/b:
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In the Brent CFD market, premiums to Cash BFOE rose to their highest since 2022, before paring gains on 16 June:
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The larger gains by both Brent and WTI reflect the deeper pool of liquidity underlying these financial derivatives, resulting in a quicker reaction to market sentiment – while Dubai is more rooted in physical trading activity.
Physical Market Impact: Sour Grades Gain Ground
In the physical market, no crude export facilities, cargoes or tankers have yet been impacted. Iran’s 250,000 b/d Tehran refinery and Israel’s 197,000 b/d Haifa refinery were both attacked, resulting in less local demand for crude, but the prospect of widespread disruption to Iranian or other Mideast Gulf seaborne crude exports appears low. Iranian crude flows eastwards towards Asia-Pacific, limiting any supply fallout to European refiners – but prices for heavier, sour barrels in NWE and the Mediterranean would rise in the event of disruption to other Mideast Gulf producers’ output, particularly since Russian Urals is not a viable sour replacement option.
Already, heavier, sourer grades like Johan Sverdrup are pricing firmer relative to light sweet barrels such as Ekofisk:
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North American Heavy Crude Prices Respond to Supply Risk
Meanwhile in North America, heavier USGC and Canadian grades have proven to be more affected by the conflict than other regional crudes, as risk to Mideast supply weighs heavier on medium and heavy global balances. Mars, Southern Green Canyon (SGC), and Canadian Sour priced at Houston have all been trending higher since late May, largely since PADD 3 crude runs have recently exceeded previous 5-year highs, but the conflict significantly reversed short-term softness in Mars (Friday close at +$1.41) and pushed Southern Green Canyon to a positive (+$0.14) differential vs ICE HOU. For the year, the Mars differential to ICE HOU has averaged -$0.06. Both Mars and SGC, as exports, are potential competitors to Middle Eastern oil.
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US Light Crude Adjusts to Global Shock
On light sweet crude, forward structure for physical Midland-quality WTI crude oil had been stuck in a “smile” for the last few months, where near-term tightness held prompt and the following 6-7 months in backwardation, with a steady transition to contango through the out-months of the curve. The Iran/Israel conflict has remedied this structure and returned the US light curves to normal backwardation.
Physical differentials for light crude have largely remained unchanged, as local and export demand remain mostly flat. The exception has been WTI ex-Basin, which seasonally was expected to be bid up, but even more aggressively so given that Cushing’s inventory levels remain just above operational minimums. Friday’s WTI Ex-Basin vs ICE HOU close at +$0.40 was the strongest reading for the year.
