Crude Pulls Back as Risk Premium Eases and Physical Markets Loosen
Crude prices moved sharply lower this week amid renewed US-Iran diplomatic efforts and a shifting political backdrop following the US midterm elections. The election results added to expectations that the administration could face greater pressure to pursue a negotiated settlement, while President Trump said the US has no immediate plans for further strikes. Iran also submitted a new nuclear proposal to Washington through Qatar, although Tehran has said negotiations will not proceed until the US addresses its seven demands. Together, the developments encouraged traders to remove some geopolitical risk premium, although the path toward a durable agreement remains highly uncertain.
The physical market has also begun to show clearer signs of loosening. JPMorgan estimates the global oil market moved into a 1.1 MMBbl/d surplus in September before widening to roughly 1.4 MMBbl/d in October as Middle Eastern exports recovered, production increased elsewhere and demand weakened. S&P Global Commodities estimates Middle Eastern crude exports averaged 15.2 MMBbl/d in October, equivalent to roughly 80% of prewar levels. Saudi Aramco also cut the December OSP for Arab Light sold into Asia by $2/Bbl to a $7/Bbl discount to the Oman/Dubai average, reinforcing signs that the physical crude market is becoming less tight.
Still, the security situation around Hormuz remains unresolved. UKMTO has reported at least five incidents involving vessels in the Persian Gulf and Strait of Hormuz since Sunday, including a tanker struck north of Qatar. Shipping through the strait remains disrupted and no durable US-Iran agreement has been reached, leaving the market vulnerable to a rapid rebuilding of geopolitical risk premium if talks stall or attacks intensify.
Global supply buffers also remain considerably thinner than before the conflict. ADNOC estimates nearly 1 billion barrels of crude have been drawn from inventories since disruptions around Hormuz began, leaving less flexibility to absorb another material supply interruption.
AEGIS maintains a bullish view on Bal 26 WTI. The near-term fundamental picture has become less supportive as Middle Eastern exports recover and the global balance moves back into surplus. However, the risk of renewed military escalation remains high as US-Iran negotiations continue without a breakthrough and shipping through the Strait of Hormuz remains disrupted. With inventories materially depleted, another deterioration in regional production or exports could quickly tighten the balance again. We therefore continue to see near-term risks tilted to the upside, while sustained diplomatic progress and continued export normalization remain the primary downside risks.
We remain neutral on Cal 27. The underlying 2027 supply-and-demand balance remains considerably more bearish if Middle Eastern production and trade normalize. The EIA projects global inventories to build by roughly 4.9 MMBbl/d next year as regional production recovers and alternative export capacity expands. The election result and improving physical supply arguably strengthen that normalization case, but continued uncertainty around Hormuz and the durability of any US-Iran agreement keeps us neutral relative to the current curve.