The price of physical crude has collapsed in recent weeks from premiums of over $30 per barrel above the Brent benchmark in early April, to near-parity or even at small discounts in the May buying cycle window.
That’s not because the worst-ever disruption in oil markets has eased and supply has suddenly become plentiful from sources other than the Middle East. It’s because refiners are adjusting their buying behavior and backing out of nearly $150 per barrel physical cargo prices in hopes of a resolution to the conflict and an eventual reopening of the Strait of Hormuz sooner rather than later.
Over the past weeks, refiners have been using a mix of buffers to mitigate the shock of the supply loss. They have been drawing down inventories, cutting refinery runs, and taking advantage of the stock releases that the International Energy Agency (IEA) is coordinating in the biggest-ever 400 million global strategic reserves release.
Moreover, China has slashed crude oil imports to the lowest since 2022, when the country was still under Covid lockdowns, also easing the upward pressure on physical crude prices. Many refiners decided to undergo spring maintenance a bit earlier than planned. Others are in scheduled maintenance, preparing for the peak summer season. Related: Why Physical Crude Premiums Collapse Despite the Hormuz Crisis
U.S. crude oil exports have jumped to an all-time high, with WTI barrels going into Asia and Europe.
All these factors have contributed to the crash in physical crude prices in the May buying cycle.
But this reprieve could be too short-lived, and physical prices could begin soaring again very soon as the peak refinery run season approaches and the buffers in the market are being exhausted amid a lack of resolution to the Hormuz blockage, analysts say.
“The physical oil market in general isn’t pricing the catastrophic tightness,” Neil Crosby, senior oil market analyst at market intelligence firm Sparta Commodities, told Bloomberg.
However, the decline in physical crude premiums is partially the result of Asian buyers using the “bare minimum” of supply, the analyst noted.
Buffers Thinning
China’s buying behavior in recent weeks suggests that the world’s top crude oil importer is slashing imports, and refiners with smaller stock buffers have slashed run rates.
China’s crude oil imports slumped by 20%, or by 2.4 million barrels per day, in April from a year earlier. Imports were pegged by official data at 9.25 million bpd in April 2026, which was the lowest level since July 2022.
Last month, Chinese state-owned oil giants were even reselling crude for May loadings in a rare move from the majors that had cut refinery rates in response to soaring oil prices and constrained crude supply from the Middle East.
The “Chinese miracle”, as Vortexa’s Chief Economist David Wech described the plummeting Chinese crude imports and the rising onshore inventories, has been one of the pillars of the market’s efforts at rebalancing amid the worst oil supply crisis in history.
Some decline in oil consumption has surely started to manifest in Chinese data, but Vortexa believes that a combination of a broad list of factors does explain the situation.
However, “it cannot continue for much longer,” Wech said at the end of April.
The Chinese and U.S. buffers that have stopped oil futures prices from rallying to record highs could vanish before the reopening of the Strait of Hormuz, which puts the market in a “race against time,” Morgan Stanley warned last week.
Prices Set for Spike Again
Prices could spike sharply if the Strait of Hormuz doesn’t reopen until July, the analysts said.
And the currently depressed physical crude prices could surge violently again, as buyers will have to step out on the prompt supply market when the current buffers are gone.
The physical crude premiums have even dropped in recent days to levels essentially below 2024/25 average–“pretty crazy given the situation in the market,” Sparta Commodities’ Crosby wrote in an analysis on Monday.
Over the past few weeks, buyers were holding purchases, not willing to buy expensive cargoes only to see premiums crash in case of a U.S.-Iran peace breakthrough.
With the latest peace deal hopes now fading, “the arb setup dictates in that case that Brent-linked crude in particular is too cheap,” Crosby said.
“Eventually refiners and traders are going to have to come out and buy for seasonally high runs ahead.”
According to the analyst, “The stage is set for a rebound in Brent diffs as soon as the market gets convinced SoH remains closed for the foreseeable and needs to come out to buy for summer.”
Not only could physical prices move sharply higher, but the paper market could also be close to exhausting the positive bias, other market experts say.
Positive headlines could potentially mask an actual supply reckoning that demand destruction alone cannot resolve, Helima Croft, Head of Global Commodity Strategy and MENA Research at RBC Capital Markets, wrote in a note last week.
“Though the regular release of positive headlines about an imminent conflict conclusion is keeping paper prices contained, they are also impeding the curtailment of demand necessary to balance the colossal supply disruption ahead of summer,” Croft noted.
By Tsvetana Paraskova for Oilprice.com
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