Physical Oil Market Surges Past $120 as Futures Lag Behind Tightening Supply

Key points

• Dated Brent, Europe’s primary physical benchmark, has surged above $120 per barrel, contrasting with ICE Brent’s decline to approximately $101, indicating a much tighter physical market than futures suggest.
• EU governments are considering releasing 50 million barrels of emergency diesel inventories over 20 days, a move prompted by US President Trump’s threat to impose a diesel export ban.
• China has suspended most October refined product exports, reinstating a previous ban as diesel stocks sit 20 million barrels below pre-war levels and gasoline is 9 million barrels short of targets.
• The US Department of Energy is offering 40 million barrels of sour crude from the Strategic Petroleum Reserve for November-December delivery, completing a total emergency drawdown of 243 million barrels.
• OPEC+ is expected to keep November output targets unchanged at its upcoming meeting, with core producers still pumping 5 million barrels per day below pre-war levels despite recent production increases.
• The UN Development Programme warns that global fuel subsidies could exceed $1 trillion in 2026, shielding 130 million people from poverty as energy costs and borrowing rates rise.

Background

Oil markets have experienced significant volatility since early September 2026, driven by escalating US-Iran tensions and disruptions in the Middle East. In early September, Brent crude rose above $100 for the first time since July due to attacks on oil facilities and shipping routes. By late September, prices had fallen below $100 as diplomatic signals from the US and steady Middle East flows eased fears. However, recent weeks have seen a resurgence in supply concerns, with physical markets tightening sharply despite relatively stable futures prices, highlighting a growing disconnect between paper and physical oil availability.

Why it matters

The divergence between Dated Brent and ICE Brent signals a critical tightening in physical oil supply that may not be fully reflected in futures markets. This could lead to higher spot prices for consumers and industries, exacerbating inflationary pressures. The coordinated actions by the EU, China, and the US to release strategic reserves and manage exports indicate a global effort to mitigate supply shocks, but the scale of the physical squeeze suggests these measures may be insufficient to prevent further price spikes. The potential for fuel subsidies to exceed $1 trillion underscores the growing fiscal strain on governments worldwide, with significant implications for economic stability and social welfare programs.

What to watch

Watch for the outcome of the OPEC+ meeting on November output quotas, which could influence future supply levels. Monitor the actual volume of the EU diesel stock release and its impact on global diesel prices. Track China’s compliance with its export ban and any potential adjustments to its refined product shipments. Observe the US Department of Energy’s delivery of the final SPR tranche and its effect on domestic and global crude prices. Assess the long-term implications of the UN’s warning on fuel subsidies for government budgets and consumer relief programs.