Dither and Delay

Despite this easing of the geopolitical risk premium, the rapid pace of global stock draws supported crude demand, while China’s reduction in seaborne crude oil imports balanced the market and eased tightness concerns. However, this has only served to buy time, and a critical mass could be reached in the coming months, resulting in another shock for the oil markets and the global economy.

In the meantime, the ceasefire between the US and Iran has held up so far. Despite the occasional skirmish, both sides appear to prefer a diplomatic solution over a return to conflict. Still, this remains fragile, and Israel’s latest infiltration into Lebanon raises the risks of miscalculation and kinetic escalation, with Iran reportedly warning northern Israeli residents to flee if Israel attacks the southern suburbs of Beirut. Nonetheless, the prevailing trend is bearish for markets, as seen last week amid a series of bearish headlines, including an Axios headline on 28 May that said the US and Iran had reached a deal that only needed US President Donald Trump's final approval, a report that was later followed by another source claiming that Iran's senior leadership had also yet to agree to the agreement. Given their maximalist demands and lack of trust in one another, **delay and deadlock remain the more likely outcomes in the near term.**

The oil futures markets are a battleground in the information war, and both sides have attempted to jawbone, or shape, media optics through headlines that trigger market reactions. The result has been increased optimism about a peace deal that would reopen the Strait, and the positioning data speak for themselves. ICE and CFTC Commitment of Traders data indicate that **short money manager positions in Brent and WTI futures are at the highest level since the start of the conflict.** In Brent, short speculative positions have risen by 111% from the lows of late March. Players are positioning short ahead of a potential peace deal announcement. We draw parallels with the period immediately before the Iran war, when long positions were steadily accumulated in anticipation of conflict.

Turning to the physical crude markets, Dated Brent came down to earth as physical differentials cratered, even briefly turning negative. The panic buying that ensued in March and April dissipated, giving way to consistent offers in the physical and paper. This was attributed to a variety of factors: demand destruction due to challenging freight and refinery economics, and the influx of WTI Midland into Europe. Notably, Chinese counterparties were significant sellers in the paper market, including in prompt CFDs and DFLs. However, if Chinese seaborne crude imports remain below threshold levels whilst its refiners maintain their run rates, it may then seek to draw from stocks or return to the market. **Chinese players have traditionally sought the marginal Dated barrel, so the latter scenario will be one to watch in the coming month.**

The Brent/Dubai differential shifted significantly as the M1 contract maintained its bullish momentum, widening to $6/bbl, the highest level since December 2022. It marks a major shift from recent years, when prices were largely stuck between -$1 and $1. The widening spread reflects the heightened demand for Atlantic Basin crude as the marginal barrel. In addition, a potential reopening of the Strait may be bearish for Middle Eastern crude, creating conditions for oversupply as production and supply normalise. **While the Brent/Dubai retreated during the final trading days of May amid paper selling and a physical resurgence, the longer-term bullish trend remains intact.** This correction gives buyers an opportunity to (re-) enter at a lower price.

In refined products, gasoline began the month on a strong footing. The M1 RBOB swap crack rallied from below $42/bbl at the end of April to above $45/bbl by mid-May, though the move was choppy: CTA net longs in RBOB futures dipped from 20.8k to 18.7k lots in the first fortnight before recovering above 22k lots. EBOB led the strength, with the M1 transatlantic arb tightening from 29.40c/gal to a low of 21.50c/gal on 20 May. This came despite selling in the Jun'26 EBOB crack, driven instead by over 2mb of TA arb selling vs Onyx, predominantly trade houses, who held nearly 5.6mb in net shorts as of 28 May, alongside 1.5mb of spec buying in the Jun/Jul'26 EBOB spread. The fundamental backdrop was supportive: US gasoline inventories sat 10% below the 5-year average by mid-May, pushing retail prices above $4.50/gal for the first time since 2022 and sustaining expectations for transatlantic export demand as demand continued to rise into summertime. Into the second half of May, however, longs were trimmed across both RBOB futures (CTA model) and the Jun/Jul'26 EBOB spread, and the M1 RBOB crack fell sharply to $35.20/bbl by 26 May before finding support. **Going forward, seasonally, gasoline cracks tend to soften after mid-June, though a continued Hormuz closure and the draw on US inventories heading into the summer driving season, amplified by events such as the World Cup, could limit the downside.** In the East, the Singapore 92 crack mirrored early-month strength before selling off from above $28/bbl on 18 May to $15.50/bbl by 29 May, with persistent spread selling into month-end.

Gasoil followed a similar pattern, with Eastern markets seeing better support in 1H May: The M1 Singapore 10ppm crack rose from a low of below $40/bbl on 06 May to above $50/bbl by 19 May, before noting some resistance in 2H May but remaining above $40/bbl by the end of the month. **Liquidity quietened in the front of the curve in ICE LS gasoil and Singapore gasoil,** with CTA net length in the ICE LS gasoil futures easing from above 11k lots on 06 May to 1.1k lots by 29 May. **Players are opting to place their bets in the deferred region of the curve, which is less sensitive to headline risk:** Eastern gasoil saw spread buying in the Q3/Q4 region and in line with this, while the M1 gasoil East/West was muted all month, seeing good resistance above -$20/mt until 28 May, the Q3’26 gasoil E/W rallied from -$43/mt on 21 May to -$28.15/mt on 29 May.

On the heavier end of the barrel, HSFO and VLSFO have been well supported in the prompt in May. Both Sing and Euro VLSFO have seen better support this month, although the first half of May saw better support in Sing VLSFO while the latter half of the month saw Euro 0.5% take the lead, with the M1 0.5% E/W easing from above $100/mt on 18 May to briefly below $80/mt at month-end, where it found a floor. Some of this support in VLSFO may be attributed to increased gasoline yields by US and European refiners, leading towards LSSR being used as a feedstock in RFCC units and limiting VLSFO supply. Finally, HSFO told a more volatile story amid the choppy crude moves, especially in the East. In the final week of May, the Jun’26 380 contract strengthened relative to the remainder of the curve, widening Jun/Jul'26 structure, with the Jun/Jul'26 E/W box and Jun/Jul/Aug'26 380 fly both above $20/mt by the end of the month. **However, given the uncertainty in negotiations, we could see spreads from Jul'26 better supported if longs return, which may narrow the Jun/Jul/Aug’26 380 fly.**