Summary:
- Oil prices and bond yields are being tracked, as the bond market is getting it wrong about the oil market, which is supply-driven and not demand-driven.
- OPEC+'s efforts to control the market has shifted the focus of the oil market to supply rather than demand.
- The global refining system is looking stretched, as lost refineries and increasing demand have put pressure on the system.
- The refining industry is working very flat out to produce fuels like gasoline, diesel, and jet fuel from crude oil.
- The increase in demand has widened the spread between fuel prices and oil prices, particularly for diesel.
- Gasoline prices are high for this time of year and could be an indication of what's to come in the next few months.
Oil prices were pushing up bond expectations until the last month, but the bond market and the oil market seem to be getting it wrong about each other. The oil market is currently supply-driven, and not demand-driven as many earlier believed. The current focus is on supply rather than demand, with OPEC+'s effort to control the market with supply cuts until the end of the year. This could mean an increase in refined fuel prices like diesel and gasoline.
Brent Oil Climbs as Market Focuses on Supply Over Demand
Oil prices have climbed recently as the market shifts its focus onto supply over demand. This change in market dynamics has been driven by the concerted effort by OPEC plus to exert control over supply and keep it under control. The supply cuts have been extended until the end of the year, meaning that the focus of the oil market is now on supply rather than demand. This shift in focus has occurred because the oil prices are supply-driven and not demand-driven.
The Bond Market and Oil Market: What is the Disconnect?
The bond market was previously interpreting oil prices as a commentary on the global economy and the Chinese economy. The oil prices were perceived to be in sync with the conversation going on in the bond market, where expectations about bond yields were being pushed up by rising oil prices. However, this view is no longer the prevailing one. The bond market and oil market have now become disconnected, and the bond market is perhaps getting the oil market wrong.
The Global Refining System and the Oil Market
The global refining system is currently stretched because of the pandemic. The refining industry has lost a few refineries, and demand has come back even stronger than some people predicted. Crude oil cannot be used directly; it must be converted into fuel or gas for cars and planes. The refining industry is working very hard to make that happen, which is widening the spread between fuel prices and oil prices. This situation has particularly impacted diesel, and this is important for how the global economy works. Diesel prices have been quite strong recently, and this will affect how consumers pay for fuel.
Gasoline Prices Rise Despite Not Approaching the Highs of the Past
Gasoline prices have been high recently, even though they have not approached the very high levels seen after the invasion of Ukraine. This price increase is a reflection of the stretched global refining system and the focus of the oil market on supply over demand. This trend may continue over the next few months.
Gasoline prices are high for this time of the year, and it might not bode well for the months to come. The global refining industry is working flat out to convert crude oil into fuels like gasoline, diesel, and jet fuel, which is widening the spread between fuel prices and oil prices.