When the OPEC+ producer group took a U-turn and decided to prioritize market share at the expense of tightening the oil balance four months ago, the impact of the move seemed obvious. Given that the group’s members – especially those around the Persian Gulf – predominantly produce sour crude, raising output by 411,000 bpd instead of 137,000 bpd was expected to exert comparative pressure on sour crude oil grades versus sweet ones. This pressure is anticipated to intensify gradually as the accelerated supply increase was rolled over month after month and even increased at the latest get-together to 548,000 bpd. Between May and August, almost 1.8 mbpd of sour crude will have been reintroduced to the market.

Yet, as shown in the chart, sour grades have refused to budge, and the CME Group Mars Crude Oil contract currently commands an unusual premium over its lighter and sweeter peers. While dismal domestic gasoline demand is largely responsible for the latter’s weakness, other factors are also at play – namely, the counter-seasonal strength of distillates, the main feedstock of which are heavier and sourer grades. This is illustrated by the strong Heating Oil cracks displayed on the left axis of the graph. At the time of writing, this value is around $32/bbl – 10% higher than the long-term seasonal average (which includes the outlier of the 2022 panic rally in crack spreads after Russia’s invasion of Ukraine) and 30% stronger than last year’s level.

The current distillate tightness is a global phenomenon. Singapore middle distillate inventories have plunged by over 1.5 million barrels in the past two weeks. Stocks in the European ARA hub registered a small build during the latest week but remain well below the year-ago level and show a deficit compared to the 5-year average. Russian distillate – and particularly diesel – exports to Europe declined in June. The Israel–Iran conflict also provided a short-term boost to distillate prices, as Gulf producers typically ship over 1 mbpd of middle distillates through the Strait of Hormuz. In the U.S., distillate stocks are near 20-year lows as exports rise and implied demand exceeds 4 mbpd, with the agricultural season in full swing.

This strength observed in the middle of the barrel is justified by recent fundamental developments; nonetheless, it will probably prove ephemeral. If or when global distillate stockpiles begin to swell, the sour premium will likely disappear and swing into a discount, provided OPEC+ sticks with its newly adopted market share policy.