Brent's physical premium drops from $25 to $6 as nearby oil stays expensive

Brent futures touched $116 on Friday. Physical Brent traded about $25 above futures in early October. By 20 October, that gap had narrowed to $6.

Brent crude futures reached $116.10 a barrel intraday on Friday, according to a delayed ICE quote read at 10:55 New York time. They had settled at $113.17 on Thursday. For fuel buyers the pain is already here: EIA puts US on-highway diesel at $6.28 a gallon for the week to 19 October.

The price reflects more than fear of what comes after the 3 November midterms. The shape of the futures curve says oil is scarce today. On the same quote page, December Brent is $116.10 and April 2027 is $100.60. That fall of $15.50 in four months is called backwardation: nearer contracts cost more than later ones.

A fear premium for strikes after 3 November would sit on every contract that runs past that date. December through April would all carry it. Instead the price drops $15.50 across those months. That points to scarcity in oil available soonest. Buyers pay most for oil they can get soonest, which is how a market looks when supply is short now and expected to ease later.

Physical prices and futures converge

Early October showed the same tightness in another form. EIA's Europe Brent spot price tracks cargoes loading in the coming days and weeks. It ran from $125 to $130 a barrel between 5 and 9 October. The front month future, the nearest contract, settled between $100 and $105 on the same days.

That gap was about $25 a barrel and held every day of the week. A buyer who paid the physical price spent a quarter more than the screen suggested. Anyone watching only the future saw a calmer market than the barrels showed.

The gap has since shrunk. By 20 October the spot price was $115.22 and the future $108.79, a difference of $6.43. Between 7 and 20 October the spot price fell 8.6% while the future rose 8.6%. Physical oil got cheaper as futures became more expensive.

Part of the remaining gap is the curve itself. Spot is for cargoes loading within weeks, while the December future is for barrels loading a month or more later. On Friday's quote one month of slope, December to January, is $4.73. That can account for most of a $6 gap. It cannot account for $25.

Hedgers see the same slope. A hedge for January delivery costs $111.37 on Friday's quote, $4.73 less than December, so a buyer who can wait a month pays less.

Supply recovers, inventories stay low

Supply is also recovering. MarketWatch reported TankerTrackers.com data showing crude exports from the Gulf within 10% of their January and February levels. Saudi exports are 10% above their prewar average. Iran's, once about 1.5 million barrels a day, have been zero since the US reimposed its blockade in mid July.

Within 10% of normal still leaves a gap, and stocks are low. In the EIA weekly report, US commercial crude stocks fell by 3.1 million barrels to 412.5 million in the week to 16 October. That was the third weekly fall, and stocks stand 10.3 million below a year earlier. With less in storage, a missed cargo has to be replaced from elsewhere, and the nearest contracts feel it first.

Thin inventories leave no cushion against lost barrels. Michael Lynch told MarketWatch that "with inventories so thin, even the loss of 5-10 million barrels a week will keep prices elevated." The same story says attacks on vessels in the Strait of Hormuz and on Saudi Arabia's East-West pipeline keep shipping costs high.

An analyst it quotes says much of the oil still takes longer routes out of the Gulf. Longer routes keep ships busy and barrels late, which tightens the nearest contracts.

The risk after the US midterms

The risk of further attacks also has a clear date. President Trump has said he will not attack Iran before the midterms on 3 November. The New York Times has reported that the US and Israel have drawn up plans for renewed strikes afterwards. Plans are not orders, but traders cannot ignore them.

Attacks around Saudi Arabia this week have rattled traders. On Thursday Saudi Aramco ordered the evacuation of its Dhahran headquarters, its first such evacuation since the Iran war began, according to Yahoo Finance. The same report says the US ordered nonessential embassy personnel to depart the kingdom. On Friday Brent hit its highest since 4 May after Houthi attacks, Reuters reported at 1300 GMT. It is on course for a third weekly gain.

Forecasts face higher October prices

EIA's forecast assumed that Middle East flows stay constrained through the fourth quarter. Its Short Term Energy Outlook of 6 October put Brent at $105 for the quarter and $84 in 2027. EIA also cited "ongoing withdrawals of oil inventories globally" as a source of volatility. Its inputs closed on 1 October, so it misses everything since.

Deutsche Bank sees real relief only through diplomacy. Its Michael Hsueh, quoted by MarketWatch, puts Brent at $74 in 2027. His base case needs "a negotiated ceasefire leading to broader talks." The curve fits that reading: tight barrels today, looser ones if talks come.

October prices have exceeded EIA's forecast. EIA's spot series averaged $124.96 over the 14 prints from 1 to 20 October. That is about $20 above its fourth quarter forecast of $105.

The curve does not price a quick fall. December Brent is $116 and January is $111. Say November and December average $110. With October at its average so far, the quarter then averages $115, which is $10 above EIA's forecast.

The first check comes on 28 October, when EIA's next release should add spot prices for 21 to 27 October. If the gap to the future stays near $6 while the curve stays this steep, the tightness has moved from the cargoes into the contracts. On that arithmetic, EIA's outlook due on 10 November is likely to lift its fourth quarter figure.