The math of buying replacement crude does not add up anymore, with Dated Brent averaging over $20 per barrel in April on front-month futures and physical differentials and freight costs adding a bill of $20–25 per barrel.

Some in the market took last week’s retracement as a sign that the acute phase of the disruption is behind us. It is not. The physical reality that drove those margins into negative territory has not changed. The pipeline of barrels at sea has not been fixed. April is tracking a deeper production cut than March, and the flows data out of the Strait continues to deteriorate.

Worsening supply picture

The supply picture has not stabilized; it has worsened, and the path back is considerably more complicated than markets appear to be pricing.

April is on track to register a deeper supply disruption through the Strait of Hormuz than March, with total MEG production tracking around 14.3 million barrels per day (bpd), nearly 3.0 million bpd below March levels, and over 13.0 million bpd short of pre-war levels.

The Yanbu, Fujairah and Ceyhan ports are loading at all-time highs, but at a combined 6.8 million bpd (of which only 4,2 million bpd are additional), it is not enough to cover the shortfall of more than 16.0 million bpd barrels that used to transit through the strait.

In the first five weeks of conflict, we saw an average of 2.4 million bpd of crude and condensates exiting the strait, mostly consisting of Iranian flows.

The situation seemed to be improving when, in the first week of April, we saw flows increasing on the emergence of a dual corridor through Iranian and Omani territorial water and an uptick in Iraqi loadings.

But counterintuitively, after the 8 April ceasefire agreement, traffic has deteriorated.

More than a week into the ceasefire – and despite last Friday’s news that Iran would reopen the strait – no agreement had been reached on actual access conditions.

With the US naval blockade on ships entering or leaving Iranian ports, we see the last remaining flows, the Iranian ones, drying out.

A new round of talks is being discussed, with the ceasefire nominally running until Wednesday, 22 April.

However, it is important to say that even taking as guidance our base case, where the current dynamic ends in a swift, clean resolution, supply will not come back right away. Our analysis shows that it would take until July for oil flows to normalize to some 80-90% of pre-war production levels, and another 1-2 months for those barrels start showing up at ports for processing into the most urgently needed products. 

It is in this context of extreme prompt tightness that the Dated-to-Frontline (DFL) Brent benchmark has reached levels of $25 per barrel.

The DFL represents the premium that Brent physical barrels (Dated Brent) for immediate loading (typically 10-30 days ahead, current May) command over the Brent Futures front month (now pricing June).

The explosion from a couple of dollars to an average $21 per barrel in the first week of April highlights the time value of ‘ASAP’ barrels over future-delivery barrels.

Some in the market took last week’s retrace as a sign that the acute phase of the disruption is behind us. It is not.