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Tuesday, April 14, 2026

Refinery Margin Dynamics: Low Sulphur Gasoil-Brent Spread

By Century Financial in 'Investment Insights'

Refinery Margin Dynamics: Low Sulphur...
Refinery Margin Dynamics Low Sulphur Gasoil Brent Spread
SPREAD · CRACK TRADE

Refinery Margin Dynamics:
Low Sulphur Gasoil–Brent Spread

L
LONG
Low Sulphur Gasoil
QS1 Comdty · ICE
S
SHORT
Brent Crude Oil
CO1 Comdty · ICE
CURRENT RATIO
11.23
QS1 / Brent as of 16 Mar 2026
TARGET
12.50 – 12.99
Retest of crisis highs
STOP LOSS
Below 10.40
Below structural breakout level
HORIZON
Subject to Hormuz Developments
Trade duration contingent on resolution of Strait of Hormuz supply disruption
POSITION SIZING
Equal Notional Value on Both Legs
The same notional amount should be entered on both the long Low Sulphur Gasoil (QS1) and short Brent Crude (CO1) legs to ensure the spread is correctly hedged and the trade is not exposed to unintended directional crude risk.
Note: Spread trading involves risk and past performance is not indicative of future results. Investors should consider their risk tolerance before making any decisions. All prices referenced are as of 16 March 2026.

Low Sulphur Gasoil vs. Brent: 12-Month Spread Ratio

Date: 16 March 2026
Source: Bloomberg

Trade Structure

This is a spread trade structured as long Low Sulphur Gasoil (QS1) against short Brent Crude (CO1), expressed as a price ratio between the two contracts. Rather than taking a directional view on crude oil, the trade profits when Low Sulphur Gasoil appreciates relative to Brent — meaning it can generate returns if the gasoil-to-crude spread widens. The position carries a net positive holding cost of +37.52% per annum on the Century Trader platform, with the long Low Sulphur Gasoil leg receiving 47.97% p.a. and the short Brent leg costing 10.45% p.a.

Investment Rationale

The Hormuz closure is not just a crude supply shock — it is a refined product crisis. Persian Gulf refineries are a primary and largely irreplaceable source of Low Sulphur Gasoil (LSG), the benchmark marine fuel that powers the world's shipping fleet. With the strait closed, that supply is simply not available elsewhere at the scale or speed the market needs.
Middle Eastern crudes produce Low Sulphur Gasoil at yields no other region can match — Saudi Arab Light yields approximately 50% fuel oil residue versus just 33% from WTI. Supply is tightening in a way that headline crude prices alone fail to fully reflect. As a result, refined products are visibly and materially outperforming crude oil. That outperformance has room to run for as long as the conflict persists.
The Low Sulphur Gasoil/Brent ratio spiked from a 12-month low of 8.84 to a high of 12.99 at the peak of the crisis, before pulling back to 11.23. It is sitting just above the key structural support at 10.93, a level that has held as a floor on every test over the past year.
This is a relative value trade, not a directional call on crude oil. Whether Brent rallies on escalation or retreats on diplomacy, the thesis holds — refined product tightness is structural and supply-driven and does not normalize until physical inventory is rebuilt.

Why Refined Fuel Markets Are Tightening Faster Than Crude

Low-Sulphur Gas Oil (LSG) is a type of fuel oil used heavily in marine transportation. It is a type of clean diesel with low sulphur content.

With the US-Iran war in its third week and the Strait of Hormuz still facing a blockade, Low Sulphur Gasoil prices are spiking. The peculiarities of Middle Eastern crude blends mean that halting those supplies is driving up prices for the fuels used to run the world's transport system at a much faster pace. Persian Gulf crude, such as Saudi Arabia's flagship barrel, Arab Light, yields about 50% of the residue used to make fuel oils such as Low Sulphur Gasoil, compared with 33% from a barrel of WTI.

The current situation at the Strait is like a double whammy for fuel oils. Not only are Persian Gulf refineries a major direct source, but the region produces more of the product than other varieties. The waterway closure isn't just disrupting raw crude flows; it's severing the export of shipping fuel that these refineries dominate. As a result, Low Sulphur Gasoil prices are climbing faster than crude. Low Sulphur Gas Oil prices shot up 70% from $755 on 27th February to a peak of $1,287 on 9th March. This marks a $532 jump in prices. Brent, on the other hand, went up 63% from $73 on 27th February to a peak of $120 on 9th March, a jump of $47.

The real worry is also that some key ports may run dry, forcing all kinds of ships, from container vessels to bulk carriers, to halt. The fuel oil supply is very low in two of the top three bunkering locations, which are Singapore and Fujairah.

Further, the demand for Low Sulphur Gasoil is inelastic and cannot simply be switched to a dierent fuel. Prices keep rising until physical inventory is rebuilt, not until consumers change their behavior. Recent price action in fuel oil is proof that shippers are willing to pay extreme premiums because there are no alternatives.

With Persian Gulf refineries cut off from efficient distribution and European refiners now unable to source high-yielding crude, Low Sulphur Gas Oil prices face a structural squeeze that could last months, not days. Every additional week of blockade adds incremental economic pressure and validates further price acceleration in refined products relative to crude.

The Role of Short Brent in This Trade

Shorting Brent is not a bet on crude going lower - it is the hedge that keeps this trade focused. Without it, a long Low Sulphur Gasoil position would be exposed to every swing in the broader oil market, most of which have nothing to do with the refinery margin story this trade is built around. By pairing the long Low Sulphur Gasoil leg with a short Brent leg, the trade strips out that common crude market noise and isolates the one variable that matters: whether refined products outperform raw crude. That is the refinery margin, and it is precisely what is widening as the Hormuz disruption hits the product market harder than crude. In a de-escalation scenario, if Brent were to sell off on diplomatic progress, Low Sulphur Gasoil would likely move lower in tandem to some degree, with the two legs partially off setting each other and reducing the directional impact on the spread. The short Brent leg is therefore designed to keep the trade anchored to the refinery margin thesis, limiting the influence of broader crude market moves on the outcome.

Risks and Assumptions related to Back-tested trading strategies
The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
The back-tested strategy might be at risk of data dredging, which is the behavior of testing multiple hypotheses at one time, resulting in picking the data that best supports your main hypothesis.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.
A trading strategy that performs well on multiple datasets from one market (e.g., forex) might not perform as well in another market (e.g., stocks).
The strategy may not depict accuracy in terms of spread changes due to the spread-widening events.

Disclaimer: Century Financial Consultancy LLC (CFC) is licensed and regulated by the Capital Market Authority (CMA) of the UAE under license numbers 20200000028 and 301044 to carry out the activities of Financial Products dealer, Trading Broker in international markets, Trading Broker of OTC derivatives and currencies in the spot market, Introduction, Financial Consultations, and Promotion. CFC is incorporated under UAE law, registered with the Dubai Economic Department (No. 768189), with its office at 601, Level 6, Building No. 4, Emaar Square, Downtown Dubai, UAE, PO Box 65777.

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