Asia's Oil Supply Chain Buckles Under Iran Conflict Pressure

Crude oil futures prices have diverged from reality as the physical market in Asia buckles under the strain of disrupted supply chains. The benchmark Brent crude futures price rose by 4.8% to $91.98 a barrel on Wednesday, but this is not reflected in the physical market.

The premium for a physical cargo of Middle East benchmark Dubai crude over its paper equivalent surged to almost $38 a barrel on Wednesday, the highest since Russia's invasion of Ukraine in 2022. This indicates that traders are factoring in an imminent crisis, despite comments from US President Donald Trump and his administration suggesting the market can navigate the Iran conflict.

The International Energy Agency's release of a record 400 million barrels of crude from stockpiles is unlikely to address the shortage in Asia, where most of the Strait of Hormuz's 18-20 million barrels per day flow through. The current situation is vastly different from the 2022 Russian invasion, which merely led to a reshuffling of flows rather than an actual loss of supply.

Refineries in Asia are reducing processing rates and countries like China are restricting fuel exports to meet domestic demand, driving up prices for refined products. The cash differential for diesel hit a record high of $28.69 a barrel on Wednesday in Singapore, while spot prices for jet kerosene reached a record high before retreating.