Disconnect Between Physical Oil Markets and Financial Markets

The ongoing Middle East war has created a severe disconnect between soaring physical crude oil prices and much softer movements in futures and equity markets, according to traders and analysts at the Financial Times Commodities Global Summit. While physical players face shortages, logistics constraints, and skyrocketing delivered costs, financial markets are failing to price in the actual scale of disruption. Trafigura's chief economist Saad Rahim noted that oil markets are not pricing something that is actually happening, unlike the AI story.

Scale of Disruption Underpriced

An estimated 10 million to 15 million barrels per day of crude and products have been disrupted as the conflict approaches its second month, yet crude prices remain well below expected levels. Helima Croft of RBC Capital Markets warned that the scale of damage is being dismissed, with relentless optimism that it will all work out, despite the severity of the impact. Equity markets, such as the S&P 500 trading at all-time highs, appear to be brushing off the crisis, as noted by Amrita Sen of Energy Aspects.

Widening Gap Between Paper and Physical Markets

While benchmark prices have seen relatively contained increases, delivered costs for refiners and end users have surged once freight, insurance, and quality premiums are included. Socar Trading's Taghi Taghi-Zada emphasized that there is a significant difference between screen prices and what people actually pay. Logistical constraints compound this disconnect, with mispositioned tankers, surging freight rates, and constrained refining capacity, particularly for clean products like diesel and jet fuel. Gunvor's Frederic Lasserre highlighted that products, not crude, are where the real bottlenecks exist.

Shipping Disruptions and Demand Destruction

A critical variable is the disruption to shipping through the Strait of Hormuz, and even if shipping resumes, it could take six to nine months to restore flows to pre-war levels. Demand destruction is already occurring, largely outside the West, particularly in Asia and parts of Africa where real-time data is lacking. Subsidies and government intervention in the US and Europe have delayed price signals to consumers, increasing the risk of a sharper adjustment later.

Risk of Recession and Misreading the Shock

Rahim warned that the longer the disruption persists, the greater the risk that the market balances not through prices but through a widespread recession, as the molecules are simply not there. Taghi-Zada noted that assumptions about additional supply from Russia or US political intervention are unrealistic, as Russian infrastructure is being damaged and timelines are unpredictable. Amrita Sen concluded that the biggest risk may not be today's higher prices, but the much bigger problem stored up if futures continue to mislead policymakers and investors into thinking everything is fine.