The article "Why the ‘oil price’ isn’t always the oil price" highlights that the widely reported oil prices, such as Brent crude benchmarks, often do not reflect the actual prices paid by refiners. This discrepancy arises because the oil market consists of two distinct segments: a "paper market" dealing in financial futures contracts for future delivery, and a "physical market" where immediate transactions for actual oil barrels occur to meet current refinery needs. While these markets usually align, significant divergence can occur during supply crises.
During times of supply disruption, such as the current Middle East war leading to the effective closure of the Strait of Hormuz, the physical market prices can be substantially higher than the paper market benchmarks. For instance, while Brent crude was trading around $119 per barrel, and ended a recent week at about $105, refiners were reportedly paying as much as $150 per barrel. This is due to the immediate demand for oil to keep refineries operational, making "ASAP" barrels much more valuable.
This phenomenon is known as 'backwardation,' where the immediate availability of oil is priced higher than future deliveries. The "Dated-to-Frontline (DFL) Brent" benchmark, representing the premium for immediate physical barrels over future contracts, surged to $25 per barrel during the crisis, compared to a typical couple of dollars. The paper market's lower prices for future delivery often signal an expectation that supply disruptions will be temporary, potentially leading to complacency about the true demand-supply dynamics in the physical market. The International Energy Agency (IEA) described the Strait of Hormuz disruption as the largest in global oil market history, taking millions of barrels per day off the market, indicating the severe impact on physical supply. Refiners prioritize supply security over price during such crises, often paying exorbitant prices for immediate crude.
