Why benchmark oil prices don't show the full picture, Pg9

Key Highlights:

• The West Asia war has caused volatility in oil prices, with potential closure of the Strait of Hormuz impacting global energy flows.
• Brent crude traded at $126 per barrel since the war began, ending last week at $108 per barrel, but some barrels have been traded at $150.
• The oil market consists of a paper market (futures contracts) and a physical market (actual oil bought and sold).
• Closure of the Strait of Hormuz has removed millions of barrels of oil per day, marking the largest supply disruption in history, according to the IEA.

Detailed Insights:

• The paper market prices future expectations, while the physical market prices immediate demand-supply realities; prices in these markets align during stable times but diverge during supply crises.
• The Strait of Hormuz accounts for about a fifth of global oil and liquefied natural gas (LNG) flows, and its closure forces refiners to procure oil at high prices for supply security.
• Backwardation occurs when immediate availability of a commodity is worth more than its future availability, indicating the market expects the supply disruption to be temporary.
• The Dated-to-Frontline (DFL) Brent benchmark has reached levels of $25 per barrel, highlighting the premium for immediate loading over future delivery.
• Asian oil importers are paying higher prices due to supply disruptions, and if the Strait of Hormuz remains closed, oil shortages could spread to Europe and the US.
• The US military estimates it could take six months to clear mines from the Strait of Hormuz, and any incident involving a mine could further disrupt vessel flows.

Key Concepts Involved:

• Paper Market: Market for financial instruments (like futures) promising commodity delivery at a future date.
• Physical Market: Market where commodities are bought and sold for immediate use.
• Backwardation: Market condition where the current price of an asset is higher than prices in the futures market.