Crude markets underpricing an impending supply tightness

In mid-July, global crude markets appeared to have abundant supplies, following the signing of the US-Iran agreement and increased transit through the Hormuz Strait. Crude and condensates on water reached a record high of around 1.3 billion barrels on July 13th, matching the post-COVID, post-price-war peak of Q2 2020. However, this optimistic outlook proved to be short-lived.

Since that peak, Vortexa data shows a significant drop in crude on the water of approximately 200 million barrels in just four weeks, with a draw rate of 7.1 million barrels per day. This decline is 95% larger than the four-week reduction after the Middle East war began in early March, and the market seems to have barely noticed.

The immediate reason for this drop is the collapse in exports from four major crude exporters: Iran, Russia (including Kazakh transit grades), Saudi Arabia, and the United States. The combined seaborne exports from these countries fell to about 12 million barrels per day, a record low, and a 5-million-barrel decrease from just one month prior.

The drawdown of global onshore crude inventories has accelerated to approximately 2.9 million barrels per day over the past four weeks, with two-thirds of those reductions occurring in Asia. The demand side of the equation, with refinery margins near record levels due to a severe and worsening diesel shortage, does not offer any relief.

Tighter inventories in both the Atlantic Basin and Asia mean that refineries and Asian regions cannot afford to ease throughput while product inventories remain so depleted. This situation will likely intensify as China and India, in particular, increasingly compete for the same Russian crude as the autumn demand season approaches.

The market appears to be underpricing crude prices, forward structures, and physical differentials based on the physical data available.