Physical oil market outpaces paper futures
The physical oil market is experiencing severe tightness and skyrocketing spot prices that are not yet fully reflected in Wall Street's paper futures prices.
The argument
Guest Dan Pickering argued that financial markets are optimistically pricing in an expectation of peace and price declines, failing to reflect the immediate physical tightness caused by supply disruptions and drawing inventories. He expects futures prices will have to rise to match physical reality.
The thesis, stress-tested
✓ What validates it
- ✓Brent futures prices rising to converge with physical spot prices
- ✓Continued weekly drawdowns in global crude inventories
▸ Risks discussed
- ▸An unexpected resolution to geopolitical conflicts could rapidly lower prices
- ▸Slowing global economic growth could reduce overall oil demand
Hear it yourself
"The commodity associated with it is Brent North Sea crude, which in the wee small hours of this morning hit the aforementioned $126.41 a barrel. That's June delivery, which is to say the future's price. Now as we sit here at the two month mark of the most severe energy shock the world has ever seen, as every day countries are chewing their way through their inventories and ever less oil is being produced and delivered, the competition for those barrels gets steeper and steeper. And that is showing up in futures market, yes, which I just talked about, but more significantly in the physical market for oil, the very high price you will pay to get a barrel delivered to you today."