Oil market: Bearish oil market reports and risk to the upside for gas oil, diesel and MGO cracks
In this edition of Energy Market Drivers, we discuss the latest oil market reports from IEA, EIA and OPEC and the latest developments in product cracks.
Bunker Port Brief
Singapore
The Asian LSFO market is expected to find some support this week, partly buoyed by tighter arbitrage volumes from the West flowing into Singapore. Downstream LSFO premiums are expected to be supported by tighter-than-usual barge availability for nearer dates.
The Asian HSFO market is expected to stay rangebound in the near term, amid adequate prompt supplies and stable bunker demand.
The Asian gasoil market may stay rangebound to weaker, with ample supply of ultralow-sulphur gasoil, despite the market expecting fewer allocations for gasoil in China’s third batch of export allocations.
Fujairah
We see VLSFO premiums quite strong at the moment due to limited availability of product (mainly due to the local situation of UAE not importing Sudan crude in the Vitol refinery) and this had led to barge loading issues and delays at local terminals too last week and over the weekend.
We see the loading situation easing up now slowly but we expect VLSFO premiums to be high still till the FUJ market finds a decent alternative cargo source as a potential solution to the issue. HSFO discounts are steady against MOPS and we see good demand and decent barge avails too for bigger stem sizes
Port Louis
Nothing major to report for Port Louis, steady volume and demand. Strong winds are expected for the week.
Durban
Relatively constant VLSFO demand saw stable traction in the market. Gasoil remains tight, and HSFO demand is quiet. Peninsula are expected to begin operations in Port Elizabeth end of September agw.
Walvis Bay
Tight avails continue in the region, with replenishment still awaited.
New York and Panama will report later today.
For port availability and demand, download the full report here.
Even more bearish outlook from the IEA, but geopolitical risks are on the rise again
The IEA report, published last Thursday, once again highlighted that a significant oversupply of oil is expected in the coming quarters, particularly after OPEC+ has decided to unwind the second layer of production cuts, amounting to 1.65 million barrels per day (mb/d).
In 2026, the IEA now expects the oversupply to reach a record 3.33 mb/d, which is nearly 0.4 mb/d more than projected a month ago. We have to go back to the height of the pandemic in 2020 to see a similar inventory build.
The IEA report also stressed that if it had not been for Chinese stockpiling, the inventory build in the OECD area would have been significantly larger this year. China continue to be the big unknown in the oil market. Nobody really knows how much oil China have been stockpiling. The IEA says that,
“Global observed oil inventories rose for the sixth consecutive month in July. The 26.5 mb increase in July puts the cumulative growth since the start of the year at 187 mb. Chinese crude stocks rose by 64 mb over the same period – and by 106 mb from February to August, helping absorb the overhang. “
The report followed the EIA report published the day before, which assessed that the expected massive inventory build was already underway and had started earlier than expected. EIA reiterated its expectation that Brent will fall below USD 50 in early 2026, based on a significant inventory build.
EIA operates under the US Department of Energy, and the 50-dollar forecast happens to match Trump’s campaign promise of lower oil prices. EIA also projects that US oil production will remain stable or decline from here, in clear contrast to Trump’s “drill, baby, drill” rhetoric. However, the verdict is still out with respect to US crude oil production. Growth may have stalled, but we still haven’t seen any significant pullback despite the number of oil rigs continuing to edge lower. Higher productivity keeps production running, and US production has edged higher over the last four weeks.
The OPEC report, on the other hand, was unsurprisingly more positive. The cartel estimates that OPEC+ needs to produce 43.5 mb/d in the second half of the year (call on OPEC+) if inventories are not to decline. In August, OPEC+ produced 42.4 mb/d. This points to a very different market balance which, in contrast to the IEA and EIA, indicates an inventory draw unless production is increased.
Taken together, last week’s three oil market reports have reinforced that the market is heading towards a significant inventory build in Q4 and in H1 2026. Unless new geopolitical developments emerge, oil prices are likely to drift lower.
But geopolitics is undoubtedly a key risk on the upside
The IEA express it this way,
“Oil markets are being pulled in different directions by a range of forces, with the potential for supply losses stemming from new sanctions on Russia and Iran coming against a backdrop of higher OPEC+ supply and the prospect of increasingly bloated oil balances.”
On the geopolitical front, the market awaits any possible stepped-up sanctions on Russia after at least 19 Russian drones flew deep into Polish territory last week.
However, there is little indication that the U.S. will tighten sanctions. Trump’s response to the 19 drones entering Poland: “It could have been a mistake.”
However, the US is ready to impose sweeping tariffs on China of up to 50% or 100% if the rest of the G7 countries join in. But the US knows that the EU cannot, from one day to another, impose sanctions and higher tariffs, notably, as Hungary and Slovakia will likely block any such initiatives.
That said, the European Commission is preparing a new sanction package. Reuters says that the new package may include independent Chinese refineries. The current sanctions, which need to be confirmed every six months, were extended last week.
However, as we have written before, the most effective “sanctions” against Russia are the Ukrainian drone attacks on Russian oil facilities. Over the weekend, the Kirishi refinery – with a capacity of 0.4 million barrels per day – and the Novoil refinery – 0.14 million barrels per day – were hit. As always, the Russian authorities claimed that a downed drone caused the fire, even though photographic evidence shows otherwise. The attacks follow last week’s successful strikes on the Primorsk oil export terminal.
Impact on product markets and curves
The increased oil supply from the OPEC+ and potentially rising inventories, coupled with sanctions and the Ukrainian drone attacks, are some of the factors driving fuel oil and distillate cracks (diesel, MGO, jet fuel, etc).
Firstly, the higher OPEC+ production of heavy/sour crude will likely lead to an increase in residuals on the market, resulting in a greater supply of fuel oil, particularly HSFO but also VLSFO. Supplies out of China will be important here.
Hence, the recent decline in HSFO and VLSFO cracks may have a final leg to go. That said, we have a suspicion that the rapid cheapening over the last two months was an overreaction.
Hence, for consumers, both HSFO and VLSFO hedging is starting to look quite interesting. There is still some backwardation in the curves, mainly in HSFO. Furthermore, if the EU adds more sanctions on Chinese refineries using Russian crude it could impact VLSFO and HSFO pricing.
Secondly, we have seen stronger distillate cracks (gas oil, MGO and diesel). We are now entering the refinery turnaround season in Europe, and inventories remain modest. If we see tougher sanctions on Indian and Chinese refineries, coupled with the ongoing Ukrainian attacks on Russian refineries ending Russian diesel and gas oil export to the world market, we could have a combination that pushes distillate cracks significantly higher. This is one of the main risks we see for consumers this autumn.
