Regular readers will know that I’ve been more sanguine than many about the likely impact what is undoubtedly a massive oil shock being delivered by the war in Iran. But the market has still managed to surprise me: More than 100 days into the war, oil is still below $100 a barrel.
It’s not an aberration: Both the financial and the physical oil markets have remained soft, at least in historical terms, and many other indicators — including time-spreads, physical premiums, shipping costs, even refinery margins — have declined too. The market isn’t weak, but it is weaker than most anticipated. Remember back in April when hedge funds and Wall Street banks predicted oil would hit $200 a barrel?
Of course, this could all change very quickly. The ceasefire between the US and Iran is fragile, with both sides trading attacks in recent days.
Still, prices remain well below previous levels. What’s going on? The supply shock is the largest ever, so all signals point the other direction. Before the war, an average of 20 million barrels a day of crude and refined products transited the Strait of Hormuz — about a fifth of global demand. To reconcile current prices with that loss of supply requires digging into the convoluted plumbing of the global oil market. It also requires honestly: We don’t know for sure what’s happening or why — the March and April data are only starting to become available. But given that incomplete information, here’s my best effort at explaining the top 10 forces at play.
