Dated Brent Above $120 Signals a Serious Oil Squeeze

Oil prices soar above $120 per barrel, indicating a serious supply crunch in the physical markets. Despite the ICE Brent dropping towards $101 per barrel, Europe's Dated Brent benchmark has jumped above $120 per barrel, which suggests the actual market is significantly tighter than the news headlines would have one believe.

Several factors have contributed to this tight physical market. The European diesel stock release, tankers dodging in the Strait of Hormuz, and China re-imposing its refined product export ban have all played a role in the volatile trading. Meanwhile, OPEC is expected to maintain its November oil targets steady at Sunday's meeting, as its core producers are still pumping 5 million barrels per day below pre-war levels, despite a 630,000 barrel increase in August production.

EU governments are considering releasing 50 million barrels of diesel, which accounts for approximately 17% of emergency diesel inventories, over the course of 20 days. This could potentially provide some relief to the market, but final volumes remain to be confirmed. The United Nations warns that fuel subsidies could exceed $1 trillion in 2026 due to the US-Iran war, rising oil prices, and mounting borrowing costs, threatening to pull 130 million people below the poverty line of $6.85 per day.

China has suspended most refined product export shipments, reinstating its previous export ban, with diesel stocks around 20 million barrels below pre-war levels and gasoline 9 million barrels short of its target. This has triggered a massive rally in Asian cracks. The U.S. Department of Energy has offered the final tranche of its Strategic Petroleum Reserve (SPR) release, providing 40 million barrels of sour crude for delivery in November and December, bringing the country's total to 243 million barrels once delivered.

Various other developments have also impacted the oil market, including Russia extending its diesel export ban through October, Gunvor changing its name to Centalion and moving to Singapore, China demanding supply guarantees for the Anglo-Teck merger, JERA taking over Japan's SPR network, and China's coal prices hitting a three-year high.