The global oil market is facing a significant duality; while the price of oil futures contracts is around $100, the price of physical oil delivered in the market has reached approximately $131, creating a $31 gap between the 'actual barrel' and the price quoted in paper markets.
Price Difference Between Physical Oil and Futures Contracts
This price difference has drawn attention to the actual supply of oil and the conditions of the physical market. Physical oil, or 'dated Brent', refers to cargoes that are currently available for delivery and loading in the North Sea; in contrast, the price of futures contracts reflects traders' expectations about the future state of the market.
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Under normal circumstances, the gap between the price of physical oil and futures contracts is not that large. However, the current gap has reached about $31; this means that if the futures contract price is around $100, a refinery needs to pay about $131 to secure a barrel of available and deliverable oil.
Causes of the Increasing Price Gap
This discrepancy may indicate pressure in the physical oil market; a market where the actual supply, access to cargoes, transportation costs, and shipping conditions are more important than traders' long-term expectations.
An examination of the trend of this discrepancy shows that the gap between physical oil and futures contracts increased to about $36 during the war and on April 9 of this year. After that, the price gap even entered negative territory in July, but in recent weeks it has grown again and is now at $31; a level that is close to previous market peaks.
Traders in the futures market may believe that with the reduction of tensions, the return of shipping routes to normal conditions, and the resolution of supply disruptions, pressure on the oil market will decrease. However, refineries need actual oil to continue their operations and cannot substitute today's required feedstock with promises of lower prices in the future.
The continuation of such a gap may indicate that the physical oil market is still facing supply constraints or increased costs of accessing actual cargoes, while the futures market has incorporated a significant portion of the scenario of the end of the crisis and improvement of supply conditions into its prices.
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