Brent vs WTI Update: Falling on Optimism

Markets are rebounding on hopes of a diplomatic resolution in the Middle East, while crude prices fluctuate amid shifting inventories, refinery outages, and shortages in some areas.

The Market Moving Points

• Brent hovers around $100 per barrel as markets price in hopes of a diplomatic solution to the war.
• The spread between WTI and Brent hit its widest in 11 years as suppliers struggle to balance sufficient inventories in the Atlantic Basin with demand in the Far East.
• The inflationary effect could persist beyond the conflict, as higher energy costs in China raise the price of manufactured goods.
• While markets are temporarily more optimistic, significant uncertainty about the conflict and the future of oil prices persists.

Crude Falls on Hope for Talks

After starting in the red over the potential of a major escalation in Iran, market sentiment has done a 180-degree rotation by mid-week as US President Donald Trump puts out a 15-point plan to end the war in Iran. The plan would potentially allow for a month-long ceasefire. Over the last couple of days, there have been increasing signs of distention, although various Iranian officials vehemently denied they are willing to negotiate, an increasing number of ships have been able to transit the Strait of Hormuz. By early Wednesday, Brent is threatening to fall below $100/bbl, while WTI is already below $90/bbl. The war continues, with both the US and Israel continuing air operations inside Iran, which periodically launches missiles towards Israel.

Markets are reacting to signs of optimism, but amid a heavy pall of uncertainty that could cause an abrupt shift in sentiment. While Trump has touted the talks, Iranian officials have denied they are taking place. Trump's threat of striking energy infrastructure in Iran by Friday if there is no substantial progress in talks remains in effect. Brent rose as high as $113 on Monday and dipped to $97 on Tuesday before coming back into the triple digits early on Wednesday. Not only are there conflicting reports about what's happening in the war, but traders also have to navigate a complex global energy network, with some areas more affected by the crisis than others. While Asia has been particularly affected, there remains ample inventory in the Atlantic Basin. But while crude remains readily available in the US, refining capacity is highly constrained, pushing up prices of certain distillates such as diesel. Europe still has ample inventory, but some countries are facing shortages, with Slovenia the first to resort to rationing. The EU as a whole has ample fuel and refined products, but its distribution network makes certain countries more vulnerable to supply shocks.

Markets Adjust to Shifting Supplies

Shifting market concerns have pushed the WTI-Brent spread to its widest in 11 years at times. The US is releasing 172 million bbls of its strategic reserve to calm prices. While the potential for a swift end to the war might knock down prices, it could also exacerbate the short-term pain in certain countries, particularly Asia. Higher energy prices, in Europe or the Far East, would incentivise shipments from areas with higher inventories. But if the war is over soon, then the price differential will vanish in the time it takes the cargoes to transit. On top of that, as many as 1000 ships are currently trapped behind the Strait, meaning that even if there are enough supplies in the Atlantic basin, there might not be the means to ship them to the Far East to meet the high demand. High prices that Asia is paying for crude at the moment could filter through to the broader economy in the coming months, worsening inflation even if the war is resolved.

Brent Struggles to Sustain $100 Support

Brent crude faces its first week of decline in a while, risking losing the $100/bbl level. The middle VWAP is far from current prices at $71, with $91 and $80 marking significant breakdowns. If the chokepoint reopens for more cargoes or there is a deal to finally end the war, Brent could drop fast. However, if tensions escalate and Brent reclaims $100 for good, it would expose the local peak at $116 and the $135 spike recorded in 2022 in the aftermath of Russia’s invasion of Ukraine.

Source: SpreadEx | Brent, Weekly Chart