Spot premium drops from recent highs, collapsing demand is more fatal than a supply gap

⑴ The spot premium for crude oil has retreated from the record highs set during the Iran war. Traders and analysts note that refineries are tapping into inventories and cutting processing volumes to deal with supply disruptions from the Middle East. Citi analysts estimate that, since February 28 when US and Israel launched military action against Iran leading to the near-complete closure of the Strait of Hormuz, the global market has lost 500 million barrels of crude oil and refined products output.⑵ Panic buying once drove prices up, but the high oil prices have backfired, weakening demand from both consumers and refineries. Refineries chose to reduce production and turned to crude previously under sanctions. Kpler analysts point out that Asian demand has started to soften, with refineries lowering capacity, shifting the market from panic buying to more selective procurement.⑶ Although releases from strategic reserves and inventory consumption have provided some cushioning, they are far from enough to make up for the daily loss of 15 million barrels in Middle Eastern supply. Morgan Stanley estimates that demand destruction in the second quarter could be as high as 4.3 million barrels per day, which will result in a decrease of 800 thousand barrels per day in annual oil consumption for 2026—the first decline since the pandemic.⑷ As a result, spot premiums have generally weakened. On Tuesday, the premium of North Sea South Ekofisk crude over Brent spot contracts fell below $10 per barrel, halving from two weeks ago. African grades such as Forcados and Bonny Light have seen premiums drop from over $10 per barrel in mid-April to $7.75. The premium for US WTI Midland crude shipped to Asia has retreated from near-record highs of almost $40 per barrel to $20–22 per barrel. Institutional analysts believe that the fundamental shortage of oil in the market persists, and premiums will remain above pre-crisis levels, but will no longer reach the previous panic-driven record highs.