Three weeks into the Iran war, there is an ever-growing gap between the price of oil futures and supplies that determine costs for consumers in the real world.
The global Brent benchmark has jumped more than 50 per cent to around US$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 petrol, diesel and jet fuel.
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 US$200 a barrel, major European airlines say passengers will have to bear the extra costs.
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 is piling pressure on central bankers and the Trump administration before the November midterm elections.
“You look at the paper markets, they’ve entirely disconnected from the physical markets,” said Mr Jeff Currie, chief strategy officer of energy pathways at Carlyle Group. “We’re dealing with an enormous supply shock.”
The price shock could get much worse. Wall Street giants Goldman Sachs Group and Citigroup last week said that if the conflict continues, futures could hit record highs in the coming weeks, surpassing US$147.50 set in 2008. It is unusual for physical and futures prices to remain far apart for long periods of time.
Those calls are being driven by what the International Energy Agency described as the biggest-ever oil supply disruption. Goldman has estimated that 17 million barrels of oil flowing through the Persian Gulf daily are being affected by the conflict.
Brent neared US$120 twice in the last two weeks, a level not seen since 2022, putting pressure on Washington to calm the market.
On March 19 Treasury Secretary Scott Bessent told Fox Business that just days after announcing a massive stockpile release, the US could consider another one, despite question marks over the viability of doing so logistically.
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.
Other efforts to tame prices include the unsanctioning of Russian oil at sea, and there has been intense trader speculation that the US may be intervening in futures markets, something Mr Bessent has denied.
Soaring volatility has also limited the size of positions that traders can take, as it makes it more expensive to do so. While that has helped to keep a ceiling on futures, it is limited compared with the impact of the disruption in Hormuz.
“The US has almost exhausted the arsenal for stopping prices from rising, given this degree of uncertainty, if the strait isn’t opened and the uncertainty of physical damage isn’t removed,” Professor Christof Ruhl, global adviser at Crystol Energy and a former BP economist, said in a Bloomberg TV interview. “So there isn’t much they can do.”
The signs of stress are growing, too. Container shipping lines are adding fuel surcharges, and huge price swings in shipping fuel markets are causing some marine fuel buyers to hold off on large orders due to the price fluctuations.
In the US, retail petrol prices are fast approaching US$4 (S$5.13) a gallon and diesel prices have exceeded US$5. In Germany, a heating oil seller said people are buying only “when absolutely necessary” because of high prices, while airlines have cancelled some flights as jet fuel prices soar.
“Movements in energy markets feed through to our cost base almost immediately,” said Mr Pavel Kveten, chief executive at Girteka Logistics, one of Europe’s top trucking companies. Fuel makes up about 30 per cent of the firm’s transport costs, he said.
Highlighting the scramble for real-world barrels of crude, the Oman benchmark in the Middle East rose above US$162 a barrel last week. Murban crude from the United Arab Emirates topped US$145. As those prices soar, Asian buyers have scooped up the most American oil in three years, hunting for replacements for Middle Eastern flows that increasingly look like they will be curtailed for longer.
For now, the war shows no signs of easing as the conflict enters a fourth week. Iranian officials have become reluctant to even discuss reopening Hormuz as they focus on surviving the US-Israeli onslaught, a person involved in direct, high-level contacts with Tehran said on March 20.
“We see little relief for the deepening energy crisis as more energy facilities come under fire,” RBC Capital Markets analyst Helima Croft said in a note.
“Administration officials have spent considerable manhours working to convey to market participants that the disruption will be short-lived as the war will soon wind down. Yet nothing points to a limited engagement at this juncture.”