Since March of this year, Middle Eastern crude oil supplies have suffered a major shock, yet crude oil futures have not seen a surge. The core reason is market optimism, with funds betting on trade logistics and oil-producing countries' ability to adapt to supply disruptions by adjusting routes. Referring to the 2022 Russia-Ukraine conflict, Russian crude oil successfully bypassed external routes for export, reinforcing this expectation. However, the market overlooks a crucial fact: market adjustment capacity has its limits. Currently, crack spreads continue to reach record highs, global inventories are steadily declining, and the supply and demand of refined oil products are tightening. While the current temporary ceasefire has caused Brent and WTI crudes to fall below $90, there has been no substantial progress in peace negotiations. Investors cannot solely rely on futures prices to assess risk; crisis signals from the physical oil market deserve greater attention.

The source of this optimistic outlook: Drawing lessons from 2022, we believe the market possesses adaptive capabilities.

The prevailing market view uses the 2022 Russia-Ukraine conflict as a reference. When the West imposed sanctions on Russia, the market worried about disruptions to Russian oil exports, but crude oil continued to flow globally through adjustments to trade routes, preventing a long-term supply disruption. Investors extrapolate this to the current US-Iran crisis, assuming that even with blocked passage through the Strait of Hormuz, Gulf oil-producing countries can still adjust their shipping routes. Saudi Arabia is utilizing the Yanbu port on the Red Sea for crude oil transshipment, the UAE is simultaneously adjusting its logistics, and Iraq is also planning corresponding transshipment solutions. This buffer provided by logistical restructuring, coupled with the market's persistent hope for a peace agreement, has continuously suppressed the upward potential of crude oil futures. Even with repeated ceasefire breakdowns and mutual military threats, this optimism has not subsided.

Major vulnerability: Adaptive capabilities have limitations; refined oil products are the first to show warning signs.

This optimism has significant shortcomings; market adaptability is not unlimited. As early as the spring, analysts warned that if the conflict continued beyond June, the existing optimistic logic would be completely shattered, global inventories would continue to deplete, and shortages of refined oil products would gradually emerge. This prediction is now coming true. The most direct indicator is the continuously breaking historical records in refining crack spreads, representing a continued tightening of refined oil supply and demand. While global crude oil inventories are not exhausted, they are being reduced significantly, and the US strategic petroleum reserve is approaching a critical threshold. Demand for gasoline, diesel, and jet fuel continues to exceed supply, confirming that the actual impact of the Middle East energy export shock far exceeds the level reflected in futures prices.

Current market misconceptions: A temporary halt to fighting has led to a recovery in sentiment, but peace negotiations have lacked substantial progress.

The current decline in Brent and WTI crude oil prices below $90 is primarily due to the temporary halt in attacks between the US and Iran in the Strait of Hormuz, easing market risk aversion. It's important to clarify that this is merely a temporary pause in the conflict; there is no reliable evidence that the two sides have initiated substantive peace talks. Judging the crisis as resolved solely based on the intervals in conflict carries a significant risk of misjudgment.

Summarize

Crude oil futures prices are largely driven by market sentiment, easily underestimating the risks of physical supply. The market has long bet that logistical adjustments can resolve the Middle East supply crisis, but persistently high refined product cracking margins and declining global inventories have already triggered a series of warning signals. The market's adaptability has its limits; if the conflict escalates again, refined product shortages could quickly escalate. Short-term oil prices have corrected due to the ceasefire, but investors should not be misled by futures market movements and should focus on monitoring changes in physical oil supply and demand. At 12:29 Beijing time, WTI crude oil was trading at $82.45 per barrel.