Bear With Me

The sticking point for everything here is the Strait of Hormuz. Under the 18 June MoU, substantive nuclear talks needn't begin until the blockade lifts, something Iran needs only to use its "best endeavours" to achieve. Iran believes it alone decides when and how the strait reopens. The UN/IMO-brokered southern route on Oman’s side collapsed as Iran rejected any lane it didn't control, and an attack on a Singaporean vessel transiting that route made its unacceptability clear. The US Navy's JMIC widened its own lane on 27 Jun, putting its cards on the table, too. After Iranian drones hit two tankers, there were tit-for-tat strikes by the US and Iran, but this was not really treated as a buying event, with Trump’s reassurance of talks in Doha on 30 Jun. There were talks on 30 Jun, but they were separate. Iran was in parallel consultation with Oman about the Strait and asset unfreezing, not US-Iran technical talks. Iran held its first “Joint Hormuz Committee” meeting with Oman, indicating it believes this is solely its responsibility, not a US-dictated arrangement. This is backed up by their telling France and Oman to stop their plans to de-mine. It feels like we are not getting any closer to a solution that both parties and international stakeholders will be happy with, and we reiterate the significant selling into the standoff.

ICE COT for Brent shows the extent of this speculative selling. In the data for the week to 30 Jun, we saw managed money long positions at their lowest since the week to 16 Dec. Funds continued to increase their short positions for the 13th consecutive week, which puts the outright fund short positions in the 98th percentile for all weeks to 2013 and the long:short ratio for managed money positions dropped to the 8th percentile. CTAs have pretty much sold constantly since mid-May, but flipped to have an overall short net position in the Flux model in Jun, dropping deeper into negatives through the month, from flat on 12 Jun to -15.3k lots on 01 Jul.

The bearish frenzy in the futures also extended into the physical, where the Dated Brent physical differential fell to its lowest level since 2020, the height of the global COVID-19 lockdowns. On an outright basis, Dated Brent has dropped by over 50% since its 07 April peak of $144.63/bbl, while the physical differential fell to lows of -$1.215/bbl on 30 June. The Atlantic Basin is awash with oil, with WAF, MED, and even Middle Eastern crudes pointing in that direction. In addition, European refineries are reported to have been struggling, given the heatwave affecting operations and limiting crude throughput, dampening physical demand. It is therefore hardly surprising that North Sea crudes are struggling to clear, on top of faltering Chinese demand, with Unipec offering Forties at 6-year lows. Meanwhile, the paper market saw intense selling flows as CFD rolls flipped into contango. Nonetheless, the bearish momentum appears to have reached an inflexion point, and a contango structure provides physical traders with greater optionality, where storage plays may enter the fray. The new month provides an opportunity for the market to reset, and speculators may find the lower levels attractive to enter. European refinery margins are extremely robust and have been buoyed by gasoline cracks, where North Sea crudes provide an attractive proposition. The US is also expected to export less crude in July, making it less likely for WTI Midland to set the curve.

Moving to the Middle East, the Dubai crude market weakened rapidly as the US and Iran signed the MoU, with the front-month Brent/Dubai rising towards the $8/bbl level while Dubai spreads flipped to a contango. This was a trend that we had previously anticipated in our Dubai Market Report, where Dubai would be significantly discounted on rising output from producers, on top of crude stored on ships inside the Gulf being released to the market. The Brent/Dubai outright has since seen volatile price action, with Aug’26 falling from $6 to $3.50/bbl before reversing losses in the span of a week. Still, the Brent/Dubai curve structure is in an orderly backwardation, reflecting the market pricing in relatively adequate supply out of the Middle East. Amid continued uncertainty over how quickly market conditions will normalise, the market is likely to consolidate and reassess the fundamental picture before establishing a clear directional trend.

In the refined end of the barrel, gasoline defied the oil weakness, with the Aug’26 RBOB swap crack rallying from a low of $31.90/bbl on 04 Jun to sitting above $44/bbl on 01 Jul, where prices remain at the time of writing on 06 Jul. In Europe, the Aug’26 EBOB crack climbed from a low of $20.23/bbl to above $30/bbl at this time. On the demand side, the four-week average of US finished motor gasoline supplied (a proxy for US gasoline demand) rose from 8.8mb/d in the week ending 29 May to just under 9mb/d in the week ending 26 Jun amid the ongoing summer driving season, according to the EIA. However, this sits lower than levels seen in the previous five years. Hence, attention turns to supply to explain the recent strength, with severe hot weather in Europe standing as a key risk to FCC functioning, tightening global gasoline inventories. Total US gasoline inventories stood just shy of 214mb in the week ending 26 Jun (EIA data), 7.8% lower y/y and 6% below the 5-year average. Looking at financial positioning, the decline in CTA net length seen across the futures complex was least pronounced in RBOB futures, with CTA net length dropping from +4.6k lots on 04 Jun to -2.1k lots on 29 Jun, before recovering to +1k lots by 03 Jul. A key level to look at here will be $3.06/gal, which may trigger 3.2k lots of CTA buying (as per Flux’s estimates), while a drop to $2.77/gal could lead to the liquidation of 3.5k lots.

Meanwhile, exchange-traded open interest stands at 22.5mb in the Aug’26 EBOB crack, just above the 5-year maximum, while trade houses have continuously built shorts vs Onyx. Although these trade houses had built up net length in the Aug/Sep’26 EBOB spread vs Onyx, these players have reduced this position from above 8mb on 26 Jun to 7.5mb on 03 Jul - hinting at profit-taking amid positioning becoming too crowded. Finally, in Eastern gasoline, although support in RBOB and EBOB cracks has filtered into Singapore 92 cracks, the Aug’26 gasoline East\/West fell from a high of -$6.80/bbl on 09 Jun to a low of -$13.30/bbl on 01 Jul, where it met support and inched up to -$12/bbl at the time of writing. We have seen trade houses stand on the buy-side of the gasoline E/W, although these players have trimmed this position w/w, and it is likely the E/W will remain more dependent on EBOB tightness in the short-term.

Another key factor in gasoline support this month has come from the blending components used to make summer-specification gasoline. India, a key supplier of alkylate to the US Atlantic Coast, has witnessed a shortage of alkylate in recent months amid the nation’s bid to prioritise the production of LPG for household use. Indian refiners remain wary of switching over to Persian Gulf LPG, indicating that these players will continue to maximise their propane and butane availability for domestic use, which cuts butane availability for alkylation. On this front, total US inventories of gasoline blending components, which typically see strong seasonality and dips around the end of Q3-into-Q4 each year, have already fallen to lows seen in Q4 2025, highlighting the tightness in blending components exacerbating summer-specification gasoline tightness.

The stronger gasoline pull has also supported naphtha, with the M1 NWE naphtha crack climbing from -$11.80/bbl on 04 Jun to -$3.35/bbl at the time of writing on 06 Jul, reaching seasonal highs. Meanwhile, although the M1 naphtha E/W fell from $39.50/mt on 04 Jun to $25.50/mt on 29 Jun, MOPJ eventually regained support, allowing the E/W to return to $39/mt at the time of writing on 06 Jul. We saw flat price buying from petrochemical players, indicating that naphtha also saw a demand pull from the petrochemical industry. This support may continue to strengthen MOPJ, although rising supply from the Persian Gulf may continue to temper any upside. Moving forward, although we have seen trade houses build their net length in the Aug/Sep’26 MOPJ spread this week, these players have trimmed their net length in the Aug/Sep’26 NWE naphtha spread from 3.4mb on 29 Jun to 3mb on 03 Jul - suggesting profit-taking. Monitor for resistance in the M1 NWE naphtha crack above -$3/bbl, with key support currently standing at -$5/bbl and -$8/bbl, the latter based on the 30-day MA.

Finally, Asian propane weakened significantly following news of the ceasefire, with the M1 LST/FEI rallying from -$285/mt on 11 Jun to -$166.70/mt on 26 Jun amid propane arb buying at the end of the month, although prices met resistance here and dropped to -$210/mt at the time of writing. A significant El Niño phenomenon this year is expected to worsen the drought in the Panama Canal, where levels are projected to stand below seasonal averages into Q3 2026, although still above levels seen in 2023. This will continue to pressure the arb going forward. Meanwhile, C3 CP remains stronger, with the M1 FEI/CP diff dropping from above $70/mt this week to $42/mt at the time of writing amid C3 CP flat price buying. Players remain cautious of buying LPG via the Persian Gulf, although a drought in the Panama Canal may make it cheaper to purchase Persian Gulf cargoes into Q3 2026, especially with Chinese PDH operating rates sitting above 60% at the start of July, which may support international propane in the coming month.