Pumping Venez-oil-a

Venezuelan crude exports have already been heavily disrupted by a US blockade, resulting in ship loadings reaching a 17-month low in December 2025. In a scenario where these sanctions were removed under US control, crude balances, particularly for heavier grades, would loosen materially, pressuring heavier refined fuels such as high-sulphur fuel oil, while simultaneously supporting naphtha demand, which Venezuela imports to dilute its heavy crude. For now, however, the blockade remains firmly in place.

These concerns initially buoyed prices, with M1 Brent futures gapping up to $61.10/bbl on 05 Jan, before momentum quickly faded and prices slipped back below the $60/bbl handle. While Brent has since clawed its way back above this level, the geopolitical chaos of the past weekend has been overshadowed by a much broader theme: the looming 2026 crude oil glut. The world is awash with oil, and we first highlighted the expected 2026 crude surplus in our May 2025 global oil balance. Now, the view of a crude glut is consensus amongst oil market participants; the only question is to what extent. The IEA is the most bearish, predicting a 3.8mb/d glut. Emerging supply additions are vastly outpacing demand growth, with oil-on-water levels steadily rising. However, geopolitical risk has limited the downside to prices, with Brent resilient around $60/bbl. However, given the increasing abundance of oil, our expectation is for flat price to trade lower over the year, with the 50s being the new normal for Brent.

Spreads don’t lie, and deferred Brent futures spreads from Q3’26 are trading in a contango. Meanwhile, the Dubai crude forward curve is in a complete contango, reflecting the supply overhang. Nonetheless, front Brent spreads, reflecting North Sea fundamentals, are more resilient, with the Mar/Apr’26 futures spread trading above $0.30/bbl at the time of writing. There is a continued dichotomy between the physical and forward markets, and going long in M2/M3 or M3/M4 Brent spreads may provide an attractive proposition as a roll-up trade. However, refiners are not yet in their shoulder season and are taking advantage of elevated product cracks, with elevated run rates creating a floor for crude demand. Greater volumes of oil on water are likely to hit land as storage costs accrue, and if this timing aligns with spring refinery maintenance, then spreads will face bearish pressure, which may filter into weaker physical differentials if prompt crude struggles to clear.

Meanwhile, the war in Ukraine has entered its fifth year. Peace negotiations have largely been symbolic, suggesting the battle may be fought until its military conclusion. From a macro perspective, any meaningful ceasefire prospects may result in a lower flat price in the short term. Nonetheless, the product markets remain most sensitive to immediate geopolitical risks. Ukraine has consistently targeted Russian refineries; however, markets, especially those for naphtha, have grown desensitised to such headlines. Barring a significant escalation, these limited-scale disruptions are largely priced in. The imminent EU import ban on fuel made from Russian crude, scheduled for 21 January, was initially supportive of diesel. Still, prices have seen a rapid unwinding, with M1 gasoil cracks falling to their lowest level since August. However, they remain above the levels traded before the 12-day war. Money managers are unconcerned about supply tightness, as their length in ICE gasoil has declined by over 50% since mid-November. Short of a colder-than-usual winter, we see limited upside from these levels.

And what about OPEC? They played a critical role in early 2025, stunning markets as they quickly reversed their voluntary cuts in a bid to reclaim market share. However, their subsequent decisions have been well telegraphed and have garnered little reaction from traders, including the pause in output hikes for Q1’26. There is great speculation about whether OPEC will enact output cuts this year. This is unlikely for two reasons. First, the surplus may be smaller than expected, as excess volumes are often absorbed by China, which frequently takes advantage of lower prices. Secondly, the budget deficit is widening for many OPEC producers, and they will be reluctant to lose further market share. Still, we cannot discount such a decision, and various sources may ‘leak’ to the market beforehand and test for a reaction.

Turning to other refined products, the M1 rolling EBOB crack contract began 2026 at its highest level for this time of year, at over $10.50/bbl at the time of writing on 05 Jan. 2025 delivered a feeble summer performance, with a whipsaw in strength in Q4’25, where EBOB made seasonal highs, ending December at all all-time high for that time of the year despite strong selling. As we enter January, prices are high and may continue to correct in the coming weeks. The pricing spread dropping into negative territory was a significant factor behind the weakness in December, making physical ARA barge movements essential to monitor.

Early positioning signals indicate some scaling back of buying in EBOB spreads further down the curve, suggesting a paring of bearish risk. However, MOC flow is inconsistent from day to day, and selling is driving cracks. Looking at the CFTC positioning data, money managers have reduced their length for three weeks. Fund length dropped by 7.7% in the week to 23 Dec, with an overall drop of 25% of the total fund length from 02 Dec. Meanwhile, there has been a 210% increase in speculative short positions from 02 Dec (up 20% w/w in the week ending 23 Dec), taking these shorts to their highest in six weeks. However, net long fund positions remain above the y/y and 5-year average, suggesting further room to go before positioning saturates in either direction.

Gasoline losses may also be reinforced by naphtha, where the petrochemical industry has been anything but a golden bullet. In the East, oversupply from China has pressured the South Korean petrochemical industry, particularly in Yeosu, causing companies such as Yeocheon NCC, LG Chem, and Lotte Chemical to reduce operations and incur losses. This decline has halved subcontractor orders and led to the closure of over 400 smaller companies. Europe has been experiencing a consistent closure of cracker facilities over the years. Many older steam crackers that rely heavily on naphtha are expected to be shut down, primarily by the mid-2020s. Analysts estimate that by 2027, several million tons of ethylene capacity will have been rationalised. Cracking margins have been weak, and there is little to suggest a reversal here. Finally, the so-called “EBOB-killer” has been tripping over itself but coming back swinging each time. Dangote signed a contract with Engineers India Ltd. to double its refining capacity to 1.4 mb/d in three years. Dangote admitted the RFCC had a ‘little bit of a design issue’ and said the issues that have plagued production have been resolved. This could put pressure on EBOB, in particular, as it removes a demand avenue; however, there may be scepticism about Dangote’s production capability until the market feels it has proven itself. The past two years have been far from encouraging for speculation on the usual summer strength, with underwhelming rallies and significant sell-offs. The highly volatile state of capacity at the Dangote refinery has also undermined some confidence.

Overall, risk appetite may be more cautious this year. It is also important to remember that a warmer summer, as currently forecast, can significantly exacerbate refinery issues, especially for gasoline-producing units, making it crucial to monitor for upside risk. In the near term, however, Flux Insight’s CTA positioning highlights a lack of conviction, with net length in RBOB futures falling to -42k lots and edging toward oversold territory. Historically, when the CTA index moves below this threshold, M1 prices have rebounded a week later 60% of the time, delivering an average gain of 1.36%.