Physical Oil Flips From Bidding War To Fire Sale As Gulf Barrels Flood Back

For much of the past two months, the most important oil price in the world was the one nobody saw on TV.

While ICE Brent futures chopped around in a range, the price of actual, deliverable barrels went parabolic: as we noted at the time, Dated Brent refused to come down even as Gulf flows recovered, North Sea Forties was quoted above $140 a barrel in early October, and refiners scrambling for prompt cargoes were paying whatever it took. Regular readers will recall we have been pounding the table on this "huge physical disconnect" since the first weeks of the war, when the physical market was screaming far louder than the paper one.

Well, the physical market is screaming again. Only this time, in the other direction.

According to Bloomberg, rebounding flows out of the Persian Gulf are sending the cost of physical cargoes tumbling everywhere from the Middle East to the North Sea and West Africa. Just a few weeks ago, one of the North Sea's key grades was being offered at a premium of more than $20 a barrel to Dated Brent. On Monday, it slumped to a discount of $1.40. Meanwhile, the premium of Dated Brent itself over ICE futures, which stood at about $30 a barrel in early October, has collapsed to roughly $3.70. That is almost 90% of the physical premium gone in a month!

To be fair, physical oil remains expensive in outright terms: Dated was still above $108 a barrel on Monday. But the direction, and the speed, of the move matter much more than the level.

"Needless To Say This Does NOT Suggest A Tight Market"

The trading floors noticed it before the headlines did. In this morning's GS Execution Elevenses note (available to pro subs), Goldman's energy trader Peter Hackworth flagged that while the de-escalation chatter drove the unwind in the geopolitical risk premium, the "physical weakness [is] more interesting":

One of the larger one day moves in crude, although follows on from a Friday rip on expiry + weekend risk... CTA triggers hit, front month touched 50d ($103.72) before bouncing, now rejected at resistance... More interesting is the collapse in physical premia, with the Brent window trading at almost $1/bl discount to dated brent. Dubai has also been weakening, whilst West Africa is a mess, with Angola pushing unsold cargoes into the December programme. Needless to say this does NOT suggest a tight market.

"A mess" is probably being generous. Per Bloomberg, as many as 10-15 cargoes of Nigerian crude for loading this month were still unsold as of Friday, even as trading of December supplies has already started. One cargo of the Republic of Congo's Djeno sold at a $25 discount to Dated Brent, a level traders say they haven't seen in years, while Kazakhstan's CPC Blend is trading at the steepest discount in 14 years. And in the North Sea, one shipment for mid-month delivery was offered at a discount to Brent and... nobody bit.

Remember: these are the same barrels for which buyers were tripping over each other a month ago.

Dubai Flips To Contango For The First Time Since July

The Middle East is sending the same message. The prompt timespread for Dubai, the benchmark that sets the price for nearly all crude exported from the region, has flipped into contango, with the November contract about $2 a barrel below December. That's the first time near-term supply has outpaced demand since July, when the temporary ceasefire let a flotilla of loaded VLCCs sail out of Hormuz and prices puked. Partials traded in S&P Global's Platts window, which normally command a premium to the financial Dubai marker, changed hands at near-parity: yet another sign of oversupply.

What changed? Mostly, the barrels showed up.

Combined exports from Saudi Arabia, the UAE, Iraq and Kuwait jumped 10% to just over 15 million barrels a day in October, according to Bloomberg's tanker tracking, which puts the Gulf's Arab producers back to roughly pre-war rates despite a fresh wave of attacks on tankers in Hormuz. We first flagged the export rebound on Sept 30, when Goldman estimated that "dark exports" had lifted total Persian Gulf exports back to pre-war levels, and the physical market has spent the past month catching up. Cheaper tanker rates helped too (after a stretch that sent every crude freight index to a record, as in everything else nothing cures record rates like record rates).

Not everyone thinks this is a re-run of June. Sparta Commodities' June Goh told Bloomberg that "we are not at the same point of a mini-glut back in end-June because at that time, there was a huge volume of oil that was sitting on very large crude carriers, and exited... This time, the increase is more gradual." Gradual, maybe. But it's also persistent, which is arguably worse for anyone who stocked up at $20 over Dated.

For what it's worth, we caught the first crack in real time: the Middle East leg started rolling over almost two weeks ago.

Barrels Vs. Bets: Where The $27 Is Hiding

Which brings us to the obvious question: if the physical market is this sloppy, why is front-month Brent still trading north of $100?

Goldman has the answer, and it's the same one we discussed yesterday in "Goldman Hikes 2027 Brent Forecast For These Two Reasons". In the bank's latest note "Raising Oil Price Forecast on High Supply Disruption Risks" (available to pro subs), Goldman's commodity team led by Daan Struyven raised its Dec26 Brent forecast to $105 (from $90) and its 2027 average to $88 (from $80), while conceding that almost none of October's rally had anything to do with supply and demand:

A jump in the risk premium to around $27 now explains most of October's crude price rally. In contrast, we estimate that Brent's fair value was little changed in September and October: global inventories—its main driver—held roughly flat as adaptation largely rebalanced global oil output and consumption.

Goldman's Marquee team put a picture to it in last week's "Oil Expression: The $27 Risk Premium" note: with Brent at roughly $112 at the time, fair value was only about $85, and the bank noted that the rally reflected "precautionary buying in both physical and financial markets."

Put differently: the precautionary buying in the physical market is now unwinding, fast, while the financial market is still holding the insurance policy. Bloomberg makes the same point, noting that "much of the strength in futures is being driven by the prospect of the conflict escalating to the point that Persian Gulf oil flows to the global market become disrupted again." Translation: futures are pricing the war that might happen; physical is pricing the barrels that actually arrived.

Goldman's own scenario work shows just how wide that gap can get. In the base case, Gulf output keeps grinding back toward pre-war levels and Brent drifts toward the $80s; in the upside case, where 2027 Gulf supply runs 3.5mb/d below 2025, Brent spikes to around $140. Notably, the base case sits below the forward curve, which Goldman says assumes "1) the very high risk premium moderates and 2) Persian Gulf output continues its gradual recovery." The physical market just voted, loudly, for #2.

Everyone Was Long, And The Exit Is Narrow

That gap also explains the violence of the past two sessions, with futures down 9% in two days and Brent sinking 8% on Monday alone as Washington and Tehran both hinted at a diplomatic path. As The Market Ear put it yesterday, everyone was long oil, now comes the pain. JPMorgan's Market Intelligence desk (available to pro subs) agrees that the move was mostly about positioning, with crude sitting at the 100th percentile in the bank's CTA framework, and that "ME diplomatic progress moved Oil more than Equities, Rates or Betting Odds."

JPM also offers a hint of why Tehran might actually want a deal: Iran's oil revenues are on track to hit zero by December for the first time. Hard to fund a war on zero.

Then again, nobody on the Street is ready to sound the all clear. Goldman's Rich Privorotsky wrote this morning (available to pro subs) that he is "a little nervy that the market got ahead of itself on oil," noting the odd fact pattern of oil bouncing after a report that the US struck Iran's Qeshm Island, "an odd fact pattern if talks are progressing smoothly," and pointing out that the Saudi ETF closed near its lows, "hardly reflective of a grand bargain in the Middle East." JPM likewise calls a resumption of combat operations after the midterms "still consensus (and likely)," even if it may prove brief and limited.

And right on cue, the headlines have already reversed (again). After a Gulf-sourced report that Washington and Tehran had made concessions on the nuclear file sent oil sliding this morning, Iran's Mohsen Rezaee rejected the latest US position, insisting that all seven of Tehran's conditions must be met before Hormuz reopens, while the IRGC claimed three more tankers exploded after hitting naval mines in the Strait. Brent pared losses to trade near $103.50, which is about where it was before the "breakthrough." Same as it ever was: a de-escalation headline before the open, a denial by lunch. Today's market wrap has the rest of the ping-pong.

Trust The Barrels

So which market is right? Over the course of this war, the physical market has had a remarkably better track record than the paper one. It flagged the squeeze in the spring, when futures underpriced the physical shortage; it caught the June glut before the ceasefire headlines did; and in early October, while macro tourists were debating whether the IEA's emergency release mattered, it told us exactly how scarce prompt oil had become:

Today, the same market is telling us that the Gulf's Arab producers are shipping at pre-war rates, unsold cargoes are piling up from Lagos to Pointe-Noire, and the Middle East benchmark is in contango. If we have to pick a side, we'll side with the barrels: the $27 risk premium in futures is the thing that has to give, probably sooner than the bulls think, and Goldman's own forecast (below the forwards) more or less admits as much.

The caveat, of course, is that the risk premium exists for a reason. Iran is still mining the Strait, Washington is still "defensively" striking Iranian islands, and everyone from Goldman to JPM expects some resumption of hostilities once the midterm ballots are counted. In other words, physical oil is priced for the barrels we have; futures are priced for the barrels we could lose. One more mined VLCC and the physical market could be bidding $20 over Dated again by Thanksgiving.

Until then, the people who actually buy oil are telling you they've got plenty.

Much more in the full Goldman "Raising Oil Price Forecast on High Supply Disruption Risks" and the "Oil Expression: The $27 Risk Premium" notes, both available to pro subs.