Oil markets are struggling to reconcile geopolitics with fundamentals as headlines push prices one way while physical signals pull in the other direction. The result is a market where Brent spreads and gasoil cracks appear strong on paper, even as North Sea grades compete for premiums and US crude arrives at a discount in Europe.
Markets are operating on a split screen, with futures signaling at least some tightness still, while the physical market has been weakening markedly. The paper structure has solidified, still in backwardation. Traders added a security cushion in some instances after sustained strikes on Russian refineries and export infrastructure. Gasoil and naphtha cracks, as well as East–West differentials have stretched to levels reminiscent of the immediate post-invasion period. Meanwhile, FOB premiums for light sweet grades in the North Sea are not strong on average. The Forties have been struggling to clear at a premium to Dated, and WTI is again landing in Northwest Europe at attractive economics. One side of the market is pricing disruption; the other is signalling surplus.
Evidence of robust summer runs adds to the confusion. Saudi crude processing increased sharply year on year, channelling significant incremental barrels into gasoil exports. Brazil posted a decade-high throughput in August. OECD Asia utilisations edged higher, and India’s large sites remained busy. Even with that momentum, margins did not collapse, which suggests the ceiling on operable capacity is closer than it looks. When everything goes right, the system holds together; when a single cog slips, the strain becomes visible.
Refining flexibility, not crude availability, is the pinch point. Global conversion units are already working near practical limits, and reliability is uneven. The recurring issues at Dangote’s RFCC underline how thin that cushion can be. With winter approaching and diesel stocks still lean versus longer-term seasonal norms, the system has little room to absorb fresh shocks. When geopolitical risk collides with tight conversion capacity, product cracks do not need a demand surge to lift; they only need another outage.
Paper vs physical will not diverge forever
The present disconnect cannot persist indefinitely. North Sea physical weakness sits uneasily beside backwardated Brent spreads. Freight has clearly amplified paper moves, VLCC strength and shifting arbitrages have distorted regional clearing prices, and the dated vs futures plumbing can magnify stress in short bursts. Over time, either physical premiums should rebuild as risk materialises in prompt barrels, or paper structure should cool if the feared losses fail to curtail flows. Positioning around that reconciliation demands humility and disciplined risk limits. Meanwhile, global crude exports are averaging at multi-year highs and oil is building up on water. The market sees this and knows we are headed into a better-supplied period in Q4. The question is of timing and how to manage geopolitical risk in the paper market.
What to watch next
Three markers will frame the next leg. First, the durability of Russian product exports after repeated refinery hits will determine whether today’s risk premia harden into shortages. Second, the pace and stability of refinery restarts through global turnarounds will signal whether conversion capacity can keep up with winter demand. Third, the behaviour of WTI–Brent and North Sea FOB premiums will reveal whether physical barrels validate paper strength or force a rethink.
By Neil Crosby via Sparta
