May WTI crude oil is now up $7.66 to $102.08 on the day.
The market is increasingly worried that crude supplies will grow tighter as the Strait remains essentially closed during negotiations. Officials will meet Saturday in Pakistan but in the meantime, the crude isn’t moving and Iran has attached that to potential tolls and the ongoing Israeli strikes in Lebanon, which are continuing today.
With that, oil is picking up and is now testing the 38.2% Fibonacci retracement of the fall that began on Tuesday on signs that a deal was coming together.
The problem for the oil market is that something like 13 million barrels per day are being removed from the world market and production is shut down behind it. Once the Strait opens, it might open slowly and it could take months before it’s back to full capacity.
In that time, global inventories will be drawn down and it will leave the market inevitably tighter than otherwise. There is some surge capacity via OPEC but at most it could add 2 million barrels per day and with the attacks on Russian infrastructure, that may be optimistic.
Looking further out the curve, the market doesn’t show a big bet on structural tightness. December WTI trades at $74.68 compared to about $62 before the war started. That’s about a 20% rise which is a number that hurts central bank inflation targets but isn’t a big hindrance to global growth. Since the ceasefire though, it hasn’t moved lower and we’re now roughly in the middle of the war range.
I would argue that this chart is more important for cross-asset prices than the May number as it indicates a view on future market tightness.
For now, the stock market isn’t overreacting to the short-term crude rise but it will if the ceasefire looks like it’s falling apart
