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Developments over the past week:

* US crude inventories increased across most regions, with Cushing stocks rebounding above 20 million barrels on strong Canadian imports. Record diesel exports depleted distillate inventories to their lowest seasonal level since 1996, while gasoline production remained at a 2020-era seasonal low amid subdued summer driving demand

* The Caspian Pipeline Consortium (CPC) operates the major crude oil pipeline that transports oil primarily from Kazakhstan's Tengiz and other fields, along with some Russian crude, to the Black Sea export terminal near Novorossiysk, Russia. The system typically handles around 2% of global oil supply, making disruptions at the terminal significant for international crude markets

* Iran’s crude in floating storage rose 14% month-on-month to 135 million barrels, as renewed US enforcement slowed exports as highlighted in Exhibit 1

In our opinion:

* Record-low distillate inventories and weak gasoline production in the US underscore persistent product market tightness, keeping refining margins fundamentally supported. Sustained product exports to Europe from the US, Middle East, Russia and Asia tighten regional product balances, ultimately strengthening Asian refining margins and supporting earnings for CPCL and MRPL

* Iran’s 14% rise in floating storage highlights growing export bottlenecks rather than incremental supply, suggesting crude is being deferred, not displaced. Accordingly, the eventual removal of the blockade is likely to unleash deferred crude supplies, creating substantial downside pressure on oil prices and potentially driving a sharp one- to two-week price correction. We continue to monitor Hormuz and Bab el-Mandeb tanker flows as key indicators of physical market normalization as shown in Exhibit 2, 3 and 4

* A complete disruption of traffic through the Strait of Hormuz and Bab el-Mandeb Strait could interrupt exports of nearly 18 mbpd of crude oil and around 5 mbpd of petroleum products. Accounting for incremental supplies from alternative producers, we estimate the effective physical market deficit of crude at 11–13 mbpd

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