The Oil Prices You See Don’t Tell the Market’s Real Story

a1[2lvnu}pq}l)7tqimte]pn_media_dl_1.png ICE, Bloomberg, GME

Article content

(Bloomberg) — Three weeks into the Iran war, there’s an ever-growing gap between the price of oil futures and supplies that determine costs for consumers in the real world.

Article content

The global Brent benchmark has jumped more than 50% to around $112 a barrel as the near-complete closure of the Strait of Hormuz and attacks on Middle East energy facilities choke supplies. But the cost of almost every physical barrel is surging even more, as tight supplies boost prices of products that consumers actually use, like gasoline, diesel and jet fuel. 

Article content

Article content

Article content

Refiners in Asia, the top consuming region, are buying cargoes from thousands of miles away at eye-watering premiums to Brent as they try and secure whatever supplies are available. Trucking companies are starting to feel the impact of higher fuel costs and some parts of the world are crimping purchases of fuels that power ships. With jet fuel prices above $200 a barrel, major European airlines say passengers will have to bear the extra costs.

Article content

Article content

The disconnect between futures — which are underpinned by hundreds of billions of dollars of daily transactions — and physical oil is partly due to aggressive US attempts to keep a lid on prices, including through releasing emergency supplies. The reality is that the global economy is suffering from a bigger inflationary hit than futures suggest, something that’s piling pressure on central bankers and the Trump administration before the November midterm elections.

Article content

“You look at the paper markets, they’ve entirely disconnected from the physical markets,” said Jeff Currie, chief strategy officer of energy pathways at Carlyle Group Inc. “We’re dealing with an enormous supply shock.”

Article content

Article content

The price shock could get much worse. Wall Street giants Goldman Sachs Group Inc. and Citigroup Inc. this week said that if the conflict continues, futures could hit record highs in the coming weeks, surpassing $147.50 set in 2008. It’s unusual for physical and futures prices to remain far apart for long periods of time.

Article content

Those calls are being driven by what the International Energy Agency described as the biggest-ever oil supply disruption. Goldman has estimated that about 17 million barrels a day of oil flows through the Persian Gulf are being affected by the conflict. 

Article content

Brent neared $120 twice in the last two weeks, a level not seen since 2022, putting pressure on Washington to calm the market. 

Article content

On Thursday, Treasury Secretary Scott Bessent told Fox Business that just days after announcing one massive stockpile release, the US could consider another one, despite question marks over the viability of doing so logistically.

Article content

He then followed with comments that stunned already-exhausted oil traders: The US might lift some sanctions on Iranian oil, despite being at war with Tehran. Traders around the world, who have had to approach Iran trades with the utmost caution for years, expressed exasperation with the news.