Key Takeaways:
Brent crude futures jumped over 4% to trade at $108.38 per barrel on Tuesday, as signs of tightening physical supply and a tense geopolitical landscape overshadowed concerns about weakening demand in China and India. The international oil benchmark is now up more than 7% in two sessions, reversing a recent slide and putting the market on a potential collision course with higher prices.
"Based on historical data, crude should now trade for around $200 per barrel," energy economist Philip Verleger said in his most recent weekly report, highlighting a growing schism between current prices and underlying market fundamentals that point to a much tighter reality.
The surge builds on a 2.9% gain Monday and is supported by critically low U.S. diesel inventories. The Energy Information Administration (EIA) reports that nationwide stocks of ultra-low sulfur diesel (ULSD) are at a 10-year low for early May, having fallen 13.4% since the Iran conflict began in March. This tightness is reflected in the diesel-to-crude spread, a key measure of refiner profitability, which has rebounded towards a $1.50 per barrel premium after dipping to $1.23.
The market appears to be shifting its focus from demand destruction back to a supply squeeze that could prove more durable. While high prices have seen India's fuel demand drop 4.6% in April and premiums for Russian Urals crude delivered to the country fall from $7 to around $3 a barrel, the underlying inventory depletion in the U.S. and the ongoing risk to Middle Eastern supply through the Strait of Hormuz suggest the path of least resistance for prices is higher. The recent calm in prices was partly attributed to significant U.S. exports, bolstered by releases from the Strategic Petroleum Reserve, and a temporary collapse in Chinese crude buying, but traders are now questioning how long those balancing factors can last.
This article is for informational purposes only and does not constitute investment advice.
