Brent crude at $114: Backwardation shows tight supply

Brent above $110 becomes a supply signal

Brent crude trading near $114 a barrel is being read by parts of the market as more than a headline rally. The price action has coincided with visible signs of immediate scarcity in physical barrels and rapid inventory drawdowns. Kotak Securities’ Anindya Banerjee argues that the market is signalling tightness in prompt supply rather than a purely speculative move. That distinction matters because physical tightness tends to show up first in time spreads, freight, and inventory changes, not only in outright prices.

In recent sessions, Brent also showed sharp intraday swings. Brent was reported around $114 before later trimming to near $105 per barrel on Tuesday after the Iranian President said he was ready to end the war if Iranian conditions are met. The pullback was described as limited, reflecting doubt about an imminent peace given prior demands and the movement of US troops to the Middle East.

The curve is in deep backwardation

One of the clearest stress signals is in the futures curve. The front-month June Brent contract was cited at $113.14, while the more liquid July contract traded around $105. That creates a backwardation of nearly $1 a barrel, an unusually wide premium for immediate delivery over later supply.

In practical terms, a steep backwardation indicates that buyers are paying up for prompt barrels because inventories are being consumed faster than they can be rebuilt. Refiners and traders are incentivised to draw stocks rather than store oil, accelerating visible inventory declines. Banerjee’s point is that this pattern is a signature of physical tightness, not just momentum trading.

Inventory drawdowns are unusually large

Inventory data in the report reinforces the curve message. Global observed inventories were said to have fallen by 85 million barrels in March alone. Non-West Asia stocks were described as drawing at a pace of 6.6 million barrels a day, a rate typically associated with crisis conditions.

Even before the disruption, the market was not described as comfortable. Global crude and product stocks were estimated at about 8.2 billion barrels, the highest since February 2021, yet the International Energy Agency (IEA) expects inventories to test all-time lows by late April or early May if disruption persists. The OECD’s coordinated 400 million barrel emergency release was characterised as buying time rather than restoring balance.

Scale of outages: IEA and EIA estimates

The IEA called the disruption the largest supply outage in the history of the global oil market, according to the article. Production across the Gulf was reported to be knocked back by at least 10 million barrels a day. Separately, the US Energy Information Administration (EIA) expects shut-ins to peak near 9.1 million barrels a day in April.

Alongside broad disruption risk, the article pointed to specific operational incidents affecting supply and processing capacity. It cited Iraq shutting down production at giant oil fields, a drone strike halting operations at Saudi Arabia’s largest refinery, and Chevron declaring force majeure after Israel shut the Leviathan gas field.

What has to happen for prices to cool

Banerjee outlined two broad outcomes from here. In one scenario, supply normalises, tanker flows reroute, and Brent gradually decompresses towards the $10 to $10 range, which he linked to a normalised balance. In the second scenario, supply remains constrained and prices rise until demand destruction does the rebalancing.

The article cited historical experience suggesting sustained demand destruction tends to emerge in the $135 to $150 zone. Below that range, consumers may complain and substitute at the margin, but consumption broadly holds up. This framing matters because it sets a map of where the market might test demand limits if physical constraints persist.

A higher floor: why $15–80 matters

The piece also argues that even a benign de-escalation does not immediately restore comfort. If disruption in West Asia eases in the second half of 2026, inventories depleted during the shock still need to be rebuilt. The article lists China’s strategic reserves, OECD commercial stocks, IEA emergency buffers, and floating storage as potential rebuild sources.

That restocking process was estimated to add 1.0 to 1.5 million barrels a day of incremental call on supply through 2027, on top of underlying demand growth. Because this demand is for rebuilding buffers rather than end-use consumption, it can still keep prices supported. On that basis, Banerjee said Brent’s psychological floor appears to be resetting from near $10 pre-crisis to $15 to $10 for the next 18 to 24 months.

India: inflation, currency pressure, and fuel under-recoveries

For India, the article stresses an immediate sensitivity because the country imports nearly 85 to 90% of its crude needs. Higher crude prices raise costs across transport and manufacturing and then filter into consumer prices. It also noted early signs of strain, including slower cooking gas deliveries and pressure on businesses dependent on LPG and LNG.

On the macro side, sustained oil above $100 per barrel was cited as a risk that could push inflation beyond 5% in coming quarters, according to Dr. VP Singh of Great Lakes, Gurgaon, who also said retail pump prices would have to reflect the true crude oil price. Domestic markets were described as under pressure, with the Nifty declining in recent weeks amid higher crude, Middle East conflict escalation, and persistent foreign institutional selling. The rupee was also reported to have weakened.

Market splits: Brent-WTI spread and India’s import basket

Another signal of disruption is the divergence between global and US benchmarks. The Brent-WTI spread widened toward roughly $18 per barrel, described as near an 11-year high, as Brent rose above $114 while WTI traded around $16. The article attributed this to Brent’s direct exposure to Strait of Hormuz disruption versus relatively stable US supply conditions.

In India, the official crude import “basket” jumped to $146.09 per barrel on Tuesday, up 111.7% compared with an average of $19.01 in February. At these levels, analysts warned of under-recoveries for state-run fuel retailers unless pump prices rise or fiscal support returns. Elara Capital estimated that above $110 crude, petrol and diesel margins could swing by about Rs 6.3 per litre and LPG losses rise by roughly Rs 10.2 per kg, implying a Rs 32,800 crore increase in annual LPG under-recoveries. Ratings agency ICRA said every $10 per barrel rise in crude can add $14 to $16 billion a year to the import bill.

Key numbers at a glance

Why this matters for Indian markets and policy

Crude staying elevated affects India through multiple channels: a higher import bill, inflation risks, and pressure on fiscal arithmetic if retail prices are not adjusted. It also affects corporate earnings via input costs and freight, and can amplify volatility in equities and the currency when global risk aversion rises.

The article also highlights how quickly market structure can change when a key chokepoint is under stress. The Strait of Hormuz, which carries nearly a fifth of global oil, was reported to be under pressure with slower tanker movement and sharply higher insurance costs. That combination tightens the supply chain even before accounting for direct production outages, explaining why time spreads and benchmark gaps have widened.

Base case and what investors will watch next

Banerjee’s base case in the article is Brent in a $105 to $125 range through the second half of 2026 if Hormuz remains contested, easing towards $10 only on credible de-escalation. The key variable is whether disruptions fade quickly enough to stop inventories testing extreme lows, and whether flows can restart safely through critical routes.

For Indian investors, near-term attention is likely to remain on crude’s ability to hold above $110, movement in the rupee, and signals on pump price pass-through or fiscal measures. Globally, the market will watch tanker flows, the persistence of outages, and whether emergency releases and rerouting can slow the pace of stock draws.