Spot differentials for physical crude have pulled back from the extreme highs seen earlier in the Iran conflict, market participants and analysts said, as refiners around the world tap inventories and reduce refinery throughput to cope with the loss of Middle East barrels.
Analysts at Citi estimate that since the U.S.-Israeli war on Iran that began on February 28 caused the near-total closure of the Strait of Hormuz, the global market has been deprived of access to roughly 500 million barrels of crude and refined products output. That abrupt removal of supplies triggered a wave of panic buying that pushed premiums sharply higher. Some grades reached record premiums in excess of $30 a barrel earlier this month.
But the same elevated prices have curbed demand from both end-users and refiners, prompting a change in procurement behavior. Rather than continue broad-based panic purchases, refiners are cutting runs and focusing buying on cheaper or previously sanctioned barrels when available, while major state buyers are releasing and selling stocks into the spot market.
Kpler analysts described the shift in demand patterns, noting:
They added that this weaker pull from Asia, combined with rising supply in the Atlantic Basin, is applying downward pressure on medium sour and light sweet differentials."Asian demand is starting to ease as refiners cut runs, shifting the market away from panic buying and toward more selective procurement, with Russian barrels dominating incremental demand."
Reserve releases and trading activity
Several state-linked and commercial players have contributed to easing premiums. Two traders familiar with the matter said Sinopec will receive about 1 million barrels per day of crude from strategic reserves during April to June, enabling its trading arm Unipec to place some West African, Brazilian and Canadian cargoes on the spot market this month. CNOOC and PetroChina also sold Canadian crude exported via the Trans Mountain pipeline (TMX) during the same period, the traders said. The companies did not immediately respond to requests for comment.
Earlier in the month, Access Western Blend exported through TMX had fetched a record $8 a barrel to ICE Brent for July delivery to Asia, according to two trading sources familiar with the sales. That premium eased to around $4 last week, the same sources said.
In the North Sea, offers for Ekofisk were below $10 a barrel to dated Brent on Tuesday, roughly half the premium seen two weeks earlier. West African grades such as Forcados, Bonny Light and Qua Iboe declined to about $7.75 a barrel to dated Brent from just over $10 in mid-April.
Brazilian crude premiums have also moderated after spiking above $30 earlier in the month, traders said. Taiwan's Formosa Petrochemical bought 2 million barrels of Brazilian crude on an ex-ship delivered basis at premiums between $8 and $9 a barrel to dated Brent, while Indian refiners have recently purchased Brazilian barrels at premiums near $5 a barrel, according to those same traders.
Middle Eastern differentials that surged to record levels in March have eased sharply in recent weeks, a development that could prompt Saudi Aramco to reduce term prices for June.
U.S. grades and European spreads
Premiums for WTI Midland crude exported from the U.S. to Asia have come down from near-record differentials close to $40 a barrel above Dubai quotes. Market participants reported recent deals to Japan at $20 to $22 a barrel for August delivery, levels comparable to a month ago. In Europe, WTI traded at $7.40 above dated Brent on Tuesday, versus a premium of over $22 per barrel two weeks earlier.
Demand destruction and longer-term pressure
Part of the softening in premiums reflects consumers cutting back on a range of oil products. The pullback has affected naphtha used by petrochemical makers, liquefied petroleum gas for cooking, diesel for trucking and fuel oil for ships. Morgan Stanley estimates demand destruction could reach as much as 4.3 million barrels per day in the second quarter, which the bank projects would translate into an 800,000 barrels per day decline in total 2026 oil consumption. That would be the first annual demand drop since the COVID-19 outbreak, according to Morgan Stanley's estimate.
Despite the easing in spot premiums, market participants warn that strategic reserve releases and inventory drawdowns are not large enough to replace the estimated 15-million-barrel-per-day loss of Middle East crude supply. That imbalance means a prolonged closure of the Strait of Hormuz would continue to exert upward pressure on oil prices.
Market commentary from traders and analysts
June Goh, a senior analyst at Sparta Commodities, said the recent correction has brought pricing back to levels she described as "affordable." She cautioned, however, that the physical shortage remains, so premiums are likely to stay higher than they were before the crisis and should not return to the panicked record levels observed earlier.
Traders and analysts continue to watch flows closely as refiners adjust run rates, state majors sell from reserves and global buyers reallocate procurement. The balance between those factors will determine whether the recent relief in spot differentials proves durable or whether fresh shocks to supply or demand will push premiums higher once again.
Note on market signals included in original reporting: Market data snippets, trading-platform tickers and promotional content related to chart analysis tools were present in the reporting stream and reflect activity and commentary circulating among market participants and trading desks.