As the Iran conflict squeezes global energy supplies, U.S. oil is gaining an unusual edge

Since Feb. 28, when the U.S. and Israel attacked Iran, U.S. benchmark West Texas Intermediate crude oil has become a “strategic asset,” says Felipe Germini of Germini Energy. - MarketWatch photo illustration/iStockphoto

West Texas Intermediate crude oil has proven to be valued just as much, and sometimes even more so, than Brent crude this past month. That says a lot about the accessibility and rising importance of the U.S. benchmark in the global energy marketplace since the start of the U.S.-Iran war.

“When roughly 20% of global seaborne crude flows through a single chokepoint, and that chokepoint is functionally closed, the concept of ‘accessibility’ gets redefined overnight,” said Felipe Germini, founder and managing director at brokerage Germini Energy.

Most Read from MarketWatch

I gave my friend’s daughter cash for her wedding. I did not receive a thank-you card. Do I say something? ‘I am at a crossroads’: I’m 37 and have $1.3 million. Do I stop working to spend time with my young kids?

Brent-linked barrels from the Persian Gulf, Oman and the UAE suddenly carry a risk discount, he noted, as insurance costs for tankers transiting the Gulf have surged and some shipments have “simply stopped.”

WTI barrels, by contrast, sit in the continental United States and flow through pipelines to Gulf Cost refineries, said Germini, who’s also publisher of the “Energy Pipeline” newsletter on Substack. They load onto tankers at Houston and Corpus Christi in Texas “without crossing contested waters.”

”In a crisis that punishes seaborne exposure, landlocked becomes an advantage,” he said. “The market figured this out fast.”

The front-month contract for U.S. benchmark West Texas Intermediate crude CL00 traded above front-month global benchmark Brent crude BRN00 on April 2 for the first time in nearly four years. That has helped to highlight backwardation in the futures market — a situation where prices of oil for near-term delivery trade above those for delivery further out into the future.

It’s important to note that the front-month contract for the U.S. benchmark is WTI for May delivery CL.1 CLK26, while Brent’s is for delivery in June BRNM26. Prices can differ depending on the delivery months — but that difference can also reveal expectations for the state of the oil market in the months ahead.

WTI-Brent spread and backwardation

Normally, this one-month difference is negligible, said John Paisie, president of Stratas Advisors. But in the current environment of “extreme backwardation,” the May WTI delivery commanded a significant “scarcity premium,” Paisie told MarketWatch.

The oil futures market currently trades in backwardation. For example, the December WTI contract CLZ26 trades at around $77 a barrel, roughly $25 below the May contract.

That can suggest investors are betting that supply disruptions will ease in the months to come, analysts have said.

Story Continues

The backwardation really began to form at the onset of the war in late February, continued to widen until April 2 and has since tightened a bit, according to Dow Jones Market Data.

WTI has carried a premium over Brent in the futures market at times this month, driven by “contract timing and extreme backwardation,” said Paisie.

This dynamic was expected to disappear once the Strait of Hormuz disruption was resolved, but that timeline has become “increasingly uncertain following the newly announced U.S. naval blockade,” he added.

Prices for WTI and Brent climbed Monday after the U.S. military began a blockade of Iranian ports, following failed negotiations with Iran over the weekend to reopen the Strait of Hormuz.

On Monday, May WTI settled at $99.08 a barrel on the New York Mercantile Exchange — back below June Brent, which ended at $99.36 on ICE Futures Europe. For now, that aligns more closely with the norm; more often than not in at least the last 10 years, data show that front-month Brent has traded above front-month WTI.

Before this month, there had only been four instances in the last five years in which front-month WTI settled above front-month Brent, all of which happened in May 2022.

That’s visible in the chart above, which also shows a significant but brief drop in WTI versus Brent in 2020, when the COVID-19 pandemic destroyed demand and storage facilities filled up.

Before 2022, WTI traded above Brent on one trading day in 2020, and 13 trading days between 2015 and 2016.

A strategic asset

The premium that Brent normally carries over WTI reflects a “basic physical reality: Brent represents barrels that move by sea, across global trade routes, priced by the largest pool of international buyers,” said Germini. WTI, meanwhile, represents barrels that arrive at a pipeline junction in Oklahoma.

”Global exposure commands a premium; domestic logistics don’t,” said Germini. When that relationship inverts, the market is saying something specific — that the “value of deliverability and physical security has overtaken the value of global exposure.” Traders are “not paying up for the barrel that represents the world. They’re paying up for the barrel they can actually get their hands on.”

The U.S.-Iran conflict and the effective closure of the Strait of Hormuz have done something that no policy document or trade agreement could: “They’ve demonstrated, in real time, what happens when the world’s most critical oil chokepoint shuts down,” Germini noted.

Before the conflict, the question of whether WTI or Brent was “more important” was mostly academic, he said. Brent was the global benchmark “full stop,” while WTI was the U.S. benchmark and secondary in global commerce.

The war led the market to question what happens when Brent-linked barrels can’t physically move, Germini added — and the answer is that “buyers rotate fast toward benchmarks and grades that can move.”

“Before Feb. 28, WTI was a pricing benchmark. After Feb. 28, WTI became a strategic asset,” he said.

Still, as Paisie pointed out, there are physical constraints associated with U.S. crude in terms of total export capacity and the soaring costs of reaching Asia, which is the market most affected by the current supply shock.

U.S. exports are hitting record highs, but remain only a partial offset, Paisie said. “They cannot fundamentally bridge the massive structural deficit created by the total closure of the Strait of Hormuz.”

Spot Brent in the physical market, where oil is bought and sold for immediate delivery rather than a set future date, has moved back above $140 a barrel, said Paisie — reflecting acute near-term supply tightness caused by heavily restricted tanker traffic through the strait.

He expects those prices to move significantly higher in the coming weeks, with spot Brent crude likely to test the $160 to $190 range. That could lead to another notable shift in the market.

“A sustained move toward the upper end of that band will trigger meaningful demand destruction,” Paisie said, “and could eventually force a return to the negotiating table” for the U.S. and Iran.

Mike DeStefano contributed.

Most Read from MarketWatch

Here’s the ‘biggest single reason’ gas prices haven’t hurt consumers, according to JPMorgan

View Comments