The Disconnect Between Crude and Refined Products

When it comes to the oil market, most investors focus on Brent crude prices. However, Jeff Currie, a leading expert in the field, warns that this narrow focus is misleading. ‘Nobody on the planet earth consumes crude oil,’ Currie explained to CNBC. ‘Refineries do. Everyone else consumes gasoline, diesel, and jet fuel, and those markets look considerably uglier.’

Currently, European diesel is trading around $170 per barrel, almost twice the price of Brent crude at $90.94. Meanwhile, WTI crude is trading at $84.94. Historically, crude and refined-product prices moved closely enough that crude served as a reasonable shorthand for the broader energy market. However, Currie argues that this relationship has broken down.

One key factor contributing to the disconnect is the roughly 100 million to 120 million barrels of crude trapped inside the Strait of Hormuz following a surge in supplies in late June and early July. China then cut refinery runs, which helped keep crude prices softer but made product supplies tighter.

In other words, China did not solve the shortage. It moved it downstream. This shift has significant implications for the global energy market. As Currie noted, ‘Governments have spent decades creating an illusion of abundance during supply disruptions by releasing strategic reserves and talking markets down. That strategy has worked before. This disruption, however, is different because of its scale, duration, and the increasingly tight product market.’

The inflation implications of this crisis are far-reaching. Gasoline prices are about 30% higher than a year ago, while diesel is up 46%. Diesel feeds directly into trucking, shipping, and industrial costs, making it a key driver of inflation. Currie expects the crude-product dislocation to eventually correct as refiners chase historically high margins and increase runs. However, until then, $91 Brent may be giving investors a comforting picture of an oil market that consumers stopped living in weeks ago.

Currie’s warning highlights the need for a more nuanced understanding of the oil market. By focusing solely on Brent crude prices, investors risk missing the real story – the crisis unfolding in the refined products market. As the global economy grapples with the consequences of this disruption, it is essential to consider the broader implications of the crude-product dislocation.

The relationship between crude and refined products has been a long-standing one. However, with the recent surge in supplies and China’s decision to cut refinery runs, the market has shifted dramatically. The result is a stark disconnect between crude and refined products, with the latter experiencing significantly tighter supplies.

One of the key drivers of this shift is the increased demand for refined products, particularly diesel. Diesel is used extensively in the transportation sector, including trucks and ships, making it a critical component of global supply chains. As demand for diesel increases, the supply of refined products becomes tighter, leading to higher prices.

The impact of this crisis is not limited to the oil market. With diesel prices up 46% over the past year, the cost of transportation is increasing, leading to higher prices for goods and services. This, in turn, has significant implications for the broader economy, including inflation and economic growth.

As Currie noted, ‘The real energy shock is already showing up in the fuels people actually buy.’ By focusing on the crude market, investors risk missing the real story – the crisis unfolding in the refined products market. This disconnect highlights the need for a more nuanced understanding of the oil market and the importance of considering the broader implications of the crude-product dislocation.

In conclusion, the real oil crisis is not about Brent crude prices but about the refined products market. The disconnect between crude and refined products is a critical issue that requires a more nuanced understanding of the oil market. By considering the broader implications of the crude-product dislocation, investors can gain a more accurate picture of the oil market and the potential risks and opportunities that lie ahead.