Brent back above $100, but physical crude is flashing a bigger oil shock

The latest market report highlights that Brent crude is back above the psychologically important $100-a-barrel mark, returning to marks last noted in July as fresh disruptions to Middle East oil flows revive supply fears. But the bigger warning may be coming from the physical market. Oman/Dubai crude for November delivery is trading around $121 a barrel, a sizeable premium to Brent, suggesting that the price of prompt Middle East barrels is once again running ahead of the global benchmark.

Brent crude futures settled at $101.21 a barrel on Wednesday, up 3.4 percent, after Iran stated it had attacked 10 ships near the Strait of Hormuz following US strikes that sank five Iranian oil tankers. Brent is now up 44 percent from its July lows.

Oman-Dubai premium raises supply concerns

The nearly $20 gap between Brent and Oman/Dubai crude is an unusual move and pointed to growing stress in the physical market.

“Middle Eastern benchmarks (Oman/Dubai) trade at a significant premium of around $20 a barrel compared to Atlantic Basin benchmarks (Brent), indicating a structural anomaly,” stated Aamir Makda, commodity market observer at Choice Broking.

Brent typically trades at a premium because it is a lighter, sweeter crude and easier to refine. The current inversion, as a result, suggested that the market is placing a much elevated premium on the availability of Middle Eastern barrels.

The gap additionally highlighted the difference between the financial and physical oil markets. While Brent futures are influenced by broader macro factors, Asian refiners dependent on Gulf crude are willing to pay more to secure physical supplies.

“The $20 difference reflects intense near-term physical scarcity and regional risk premiums rather than broad, uniform global demand expansion,” Makda stated.

Falling inventories add to the pressure

Vandana Bharti, head of commodity research at SMC Global Securities stated another factor adding to premium has been softer inventories.

"That leaves the market with less cushion to absorb a sudden supply disruption. At the same time, OPEC+ has not increased production enough to fully ease supply concerns."

This means any actual disruption to Middle Eastern exports could have a bigger impact on prices than the current Brent level suggests. Brent could head towards $120

Bharti does not see $120 Brent as the immediate base case, as the approaching mild-demand season could limit consumption expansion.

That stated, if geopolitical tensions escalate into an actual disruption of Middle Eastern exports while inventories keep decline, Brent could move towards $110-115 a barrel first, with $120 becoming a realistic possibility, she stated.

The technical setup additionally stays supportive.

Makda stated Brent has broken above the $101.35 resistance of a cup-and-handle formation and is trading above its 20-, 50- and 100-day DEMA marks of $96.40, $92.84 and $91.41, respectively.

The next immediate resistance is at $109.40. A break above this level could strengthen the upward momentum and propel Brent towards $120, he stated.

For now, the key signal is not just Brent crossing $100. If Oman/Dubai prices stay elevated and inventories keep decline, the physical market could force Brent elevated, making $100 oil only the beginning of the next leg of the crude shock.