G7 Oil Release Caps Distillate Margins as Tensions Persist in Persian Gulf

The oil market remains volatile as it balances bearish and bullish factors. On the bearish side, oil flows through the Strait of Hormuz are increasing, and the G7 nations have agreed to release 100 million barrels of oil, including diesel, over the next four months. The release will be front-loaded, with a substantial diesel release occurring over the first 20 days. This move has led President Trump to rule out a US diesel export ban, which has helped narrow the ICE gasoil crack spread from around $85/bbl to about $70/bbl.

On the bullish side, tensions in the Persian Gulf continue to escalate, with increased attacks on commercial vessels. The G7's action reflects growing tightness in the diesel market as the Northern Hemisphere winter approaches. The only permanent solution to the tightness in middle distillate markets is restoring refined product flows from the Persian Gulf.

Saudi Arabia has reduced the official selling price for November-loading Arab Light crude into Asia by $3/bbl, widening its discount to the benchmark to $5/bbl. Oil flows through Saudi’s East-West pipeline are recovering, with reports indicating flows are back to more than 80% of capacity. This will allow crude exports from Yanbu to also recover.

Speculators have reduced their net long in ICE Brent by 13,812 lots over the last reporting week to 204,302 lots, the smallest position held since early August. Increased oil flows from the Persian Gulf may leave speculators reluctant to carry too much risk. OPEC+ has left production levels unchanged for November, with cumulative supply increases of 1.65m b/d announced but not yet realized due to ongoing disruptions.