Oil price divergence in a time of crisis

The closure of the Strait of Hormuz has shattered the illusion of a single global oil price, exposing a market increasingly fragmented by geopolitics, logistics and crude quality.

WHAT: The global oil market has split into multiple overlapping pricing systems, with sharp divergences emerging between futures benchmarks and the cost of securing physical crude across regions and grades.

WHY: Disruption to flows through Hormuz, rising freight and insurance costs, sanctions regimes, and refinery-specific crude requirements have broken the arbitrage links that typically keep prices aligned.

WHAT NEXT: Price fragmentation is set to persist even if tensions ease, with futures reacting quickly to headlines while physical markets adjust more slowly, leaving a more regionalised and structurally divided oil market.

There is no single price of oil. That has always been technically true, but it is rarely as visible as it is now.

The disruption triggered by the closure of the Strait of Hormuz has exposed just how fragmented the market has become. Shipping interruptions, surging war-risk insurance costs and uncertainty over Gulf exports have driven a deep wedge between futures markets and the price of physical crude delivered into consuming regions. What appears on a trading screen as one price is, in reality, a stack of overlapping markets.

Oil is priced simultaneously in multiple ways: futures benchmarks such as Brent and WTI; prompt physical markers such as North Sea Dated and Cash Dubai; delivered cargoes into specific consuming markets; and local inland or posted prices. In normal conditions, these sit within a relatively narrow range of each other. In early April, that relationship broke down.

North Sea Dated rose to roughly $130 per barrel, with the Dated-to-Brent spread widening to nearly $35 per barrel, even as Brent and WTI futures later fell back to around $90.5 and $84 per barrel on April 17 after Iran signalled that Hormuz would reopen to commercial shipping. Tehran reversed that decision a day later, which will lead to further market volatility this week.

All of those were “oil prices”, but they were pricing different barrels, at different points in time, and under very different assumptions about risk. The oil market is no longer clearing at anything close to a single global price. It is fragmenting as a result of geopolitics and logistics.

More than paper versus physical

The traditional distinction between financial and physical markets still matters. Futures, swaps and options remain the primary mechanism for pricing expectations and managing risk. They are forward-looking, liquid and indispensable.

But they do not allocate barrels.

The physical market operates on a different basis. It reflects immediate constraints: what crude is available, where it is located, how it can be transported, and whether it can be processed by a given refinery. In stable conditions, arbitrage keeps the two markets aligned. Differences are typically limited to freight, quality adjustments and regional balances.

In the current environment, that alignment has weakened sharply.

Physical crude prices have surged relative to futures, reflecting the scarcity of prompt, deliverable barrels. Futures, by contrast, continue to embed the possibility that disruption will ease. The result is a widening disconnect between what oil is “worth” on paper and what it costs to secure a cargo that can actually be run.

This divergence is not simply a technical dislocation. It is a fundamental shift in what determines value.

Pricing in the geopolitics

Geopolitics is no longer a background factor. It is now embedded directly in the pricing of oil.

The closure of Hormuz removed a critical artery for global oil flow. Prior to the crisis the strait was handling more than 20mn barrels per day (bpd) of oil, equivalent to about a fifth of global supply. Most of that supply is on hold, save for volumes successfully diverted to other routes like Saudi Arabia’s Red Sea port of Yanbu, which handled up to 3.8mn bpd in early April. 

This is a significant stress on pricing of physical barrels. While the crisis is not as visible in front-month futures prices, it is glaring in the delivered price of crude.

Sanctions create further fragmentation. Russian, Iranian and to a certain extent still Venezuelan crude do not move freely through the same commercial channels as other crude. The US has loosened some restrictions on Russian and Iranian crude through waivers on purchases granted in light of the current crisis, though most sanctions remain in place. Washington has meanwhile re-licensed some Venezuelan flow under its tight control. Essentially, restrictions on shipping, insurance and financial services as well as compliance issues create parallel trading systems for sanctioned barrels, creating unique pricing dynamics.

The Urals paradox

Nowhere is this clearer than in the behaviour of Russia’s Urals blend.

Since the invasion of Ukraine, Urals has typically traded at a discount to Brent, reflecting sanctions, logistical constraints and reduced access to Western markets. That discount has been a defining feature of global oil flows for several years.

The current crisis has complicated that picture.

On a free-on-board (FOB) Baltic basis, Urals continues to clear at a discount, as sanctions and freight constraints remain binding. But on a delivered basis into India, it has traded above forward Dated Brent, reaching a premium of more than $8-15 per barrel this month.

This is a reflection of competing pricing forces. On the one hand, sanctions and restricted access push prices lower. On the other hand, there is physical scarcity for the medium-to-heavy sour crude that dominates Gulf flow and is imported by refineries configured for those blends particularly in Asia. Urals which shares those qualities has become one of the few large-scale substitutes for disrupted Gulf supply, and so this pushes prices higher.

The result is that Urals is no longer simply a “discounted” crude. It is a differentiated product, valued differently depending on where it is sold and how it is used.

Why crude quality matters

This shift cannot be understood without considering crude quality and refining.

Oil is often described as fungible, but in practice it varies widely in density and sulphur content. Refineries are designed around specific crude slates, optimised to maximise the yield of particular products. Complex facilities – especially in Asia – are typically configured for medium and heavy sour crude, which produces higher volumes of diesel and jet fuel.

When supply of these grades is disrupted, substitution is not straightforward.

Lighter, sweeter crude from the US or West Africa can be used, but it alters product yields and often reduces margins. For refiners geared towards middle distillates, this is a significant constraint. The issue is not simply securing crude, but securing the right crude.

That distinction is now feeding directly into pricing.

Barrels that match refinery configurations command a premium. Those that do not are discounted, even if overall supply remains adequate. The oil market is therefore fragmenting not just by geography and politics, but by refining compatibility.

Regionalisation

The effects of this fragmentation are being felt unevenly across regions.

In South Asia, the challenge is not simply access to crude, but access to compatible crude. India has secured supplies from a wide range of sources and built up inventories, but refiners have still been forced to compete aggressively for medium-sour barrels. Delivered Urals into India has traded at premiums of around $8-15 per barrel to forward Dated Brent in April, while comparable Middle Eastern grades such as Dubai-linked crudes have also strengthened sharply. The result is higher feedstock costs and increased sensitivity to crude differentials.

North Asia has more flexibility, thanks to highly complex refining systems and strategic reserves. But even here, disruption has been visible. Spot cargoes of Middle Eastern sour crude into the region have traded at premiums of roughly $6-10 per barrel to Dubai benchmarks in recent weeks, reflecting tight prompt availability. Refiners in Japan have reduced utilisation rates while awaiting replacement cargoes, and procurement strategies have shifted rapidly as buyers adjust to changes in benchmark pricing and availability.

Europe faces a different set of pressures. The region is less dependent on Gulf crude, but it has been drawn into a bidding war for Atlantic Basin supplies as Asian buyers seek alternatives. North Sea Dated has traded at around $130 per barrel in early April, implying a premium of nearly $35 per barrel to Brent futures at one point. West African grades such as Nigerian Bonny Light have also strengthened, with premiums of several dollars per barrel to Dated Brent as European refiners compete for replacement barrels. This has driven up feedstock costs, while product prices have not always kept pace, squeezing refining margins.

In North America, the fragmentation takes on a different form. Domestic crude remains relatively insulated, but pricing divergence is widening within the system. WTI at Cushing has traded near $84 per barrel, while export-linked WTI Houston and Louisiana Light Sweet have commanded premiums of $3-6 per barrel, reflecting strong international demand. Inland grades, by contrast, have lagged, highlighting the growing separation between domestic and export markets.

Benchmarks under strain

This fragmentation is also putting pressure on the benchmarks themselves.

Physical markers such as North Sea Dated and Dubai have seen extreme movements as prompt supply tightens. In Asia, Dubai’s forward structure has swung into steep backwardation, reflecting the scarcity of immediate barrels. In some cases, the volatility has been sufficient to alter behaviour, with refiners adjusting their pricing references to better reflect available supply.

When benchmarks no longer align with the physical realities faced by market participants, their role begins to shift. They remain essential for hedging and price discovery, but they become less reliable as a standalone indicator of market conditions.

The oil price, in other words, becomes more contextual.

What next?

In the short term, this fragmentation is likely to persist and even become even more pronounced while the crisis continues. 

Financial markets will continue to react quickly to geopolitical headlines, as seen in the sharp drop in futures prices on April 17 following signals of a potential reopening of Hormuz. Physical markets, however, are likely to adjust more slowly. Freight costs, insurance premiums and supply chains do not normalise overnight, even when tensions ease.

The result will be uneven price movements across different parts of the market. Futures may fall on expectations of de-escalation, while physical premiums remain elevated as refiners continue to secure prompt supply.

Over the medium term, some degree of reconvergence is likely, particularly if flows through Hormuz stabilise and sanctions regimes remain predictable. But a full return to the pre-crisis pricing structure may take considerably longer.

The underlying drivers of fragmentation – geopolitical risk, logistical constraints and refining compatibility – are not temporary anomalies. They are structural features of the modern oil market.