The Middle East crude market weakened sharply this week, slipping into discounts according to Reuters data, after the United States and Iran agreed a framework deal to reopen the crucial Strait of Hormuz, brightening the global supply outlook.
Contango Structure and Premium Collapse
Benchmark Dubai's premium to swaps slipped into a discount of 46 cents on Tuesday, the first contango structure since January, Reuters' data showed, after hitting pre-war levels of $2.06 per barrel on Monday. Contango is a market structure in which prompt cargoes trade at a discount to later-dated ones, indicating ample supplies.
Similarly, spot Oman and Murban differentials flipped into discounts of 67 cents and 49 cents respectively on Tuesday. For context, spot premiums for Dubai and Oman hit record highs of more than $60 per barrel while Murban's peak was more than $50 in March after the conflict disrupted supplies.
| Benchmark | Premium/Discount (Tuesday) | Pre-war Level (Monday) | March Peak |
|---|---|---|---|
| Dubai | -$0.46 | $2.06 | >$60 |
| Oman | -$0.67 | -- | >$60 |
| Murban | -$0.49 | -- | >$50 |
Supply Side: US-Iran Deal and Strait of Hormuz
The supply outlook brightened after the U.S. and Iran agreed a framework deal to reopen the Strait of Hormuz. Before its closure, the Strait carried about a fifth of global supplies of crude oil and liquefied natural gas.
"While practical timelines for the reopening remain uncertain, an estimated 4 million barrels per day of crude was already navigating the waterway prior to the diplomatic breakthrough," said Kpler's senior crude oil analyst Naveen Das. "A formal reopening will unleash millions of barrels currently trapped in floating storage, directly inflating the physical volumes that dictate the Dubai benchmark and applying intense downward pressure on regional pricing."
Ahead of the signing of a preliminary agreement, some Middle Eastern producers managed to export some oil out of the strait, which eased supply tensions. Abu Dhabi National Oil Company (ADNOC) has sold at least 30 million barrels of spot crude to Asian refiners and trading firms so far this month and offered more this week.
Demand Side: Weak Asian Refining and Chinese Demand
The Dubai benchmark has been weakening since April as elevated crude costs curbed buying interest from Asian refiners, prompting run cuts and higher purchases of alternative grades from regions such as the United States. With Asian refining demand led by China still subdued after months of run cuts, hopes of higher supply after the deal pushed Dubai and other Middle East benchmarks into contango and opened rare arbitrage opportunities to Europe and the United States.
Arbitrage to US and Europe Opens
The collapse in Middle East crude prices has also reopened arbitrage opportunities to destinations beyond Asia. About four to five Very Large Crude Carriers carrying Abu Dhabi's Murban and Das crude were heading to Europe, according to one trader, who added that the cargoes belong to Exxon Mobil. Each VLCC can carry 2 million barrels of oil.
Another trader estimated 13 million to 15 million barrels of Middle East crude, including Upper Zakum, Murban, Oman and Iraqi Basrah Medium, are being shipped to the U.S. and Europe by oil majors Exxon Mobil and TotalEnergies. The companies typically do not comment on commercial deals.
The shipments became economical for Europe after weak Asian demand and falling Middle East crude premiums narrowed the price gap with competing Atlantic Basin supplies, traders said. Murban has become cheaper than U.S. West Texas Intermediate (WTI) crude for European buyers as demand in Asia is weak, two traders said.
The arbitrage for U.S. WTI to Asia has also closed since early June, traders said, putting pressure on the U.S. benchmark grade. WTI Midland in west Texas flipped on Tuesday to trade at a premium to the same grade in Houston for the first time since late May, as export demand slipped on a rapidly closing arbitrage window.
These dynamics highlight the interconnected nature of global crude markets, where a diplomatic breakthrough in the Middle East quickly ripples across benchmarks, tanker routes, and refinery economics worldwide.
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