The price for oil that you’re seeing on the screen is nothing more than a mirage. That is where markets are currently sitting at. WTI crude is sitting under $100 and even though it has been climbing a little since the Wednesday plunge, it belies the fact that prices in the physical market are much higher.
And I’m not talking about a measly $5-10 higher. I’m talking about a gap of around $30-40 relative to what we’re seeing in the futures market.
This is as good a time as any to remind newer traders that when we trade oil prices, we’re trading contracts – more specifically futures contracts. In this current predicament, we’re trading the May contracts up until the point where we meet the cutoff and we roll over to the next month.
And traders are taking the view that all is going to turn out well with regards to the US-Iran talks in the coming days. That as we see WTI crude trade around $99.85 currently.
In the real world though, reports are stating that physical barrels for immediate delivery towards Asia and the Middle East are trading between $126 and $140 per barrel. That’s a significant premium compared to what we’re seeing futures trade for currently.
The fact remains that Iran has restricted access via the Strait of Hormuz. So, many refineries and major corporations in Asia are willing enough to pay some $30–$40 premiums just to secure whatever physical oil that is already outside the strait.
This sort of gap/arbitrage doesn’t happen all too often and in due time, one can reasonably expect it to close. And when it does, it is going to be a quick and violent snap for markets. The only question is, which direction do we move towards?
This is where the 21 April cutoff date is a pivotal one to watch out for. If there is no positive developments from US-Iran talks in the coming week or so, something has got to give. The May contracts will expire then and without any breakthrough in peace talks, expect there to be major scramble where traders try to buy every last contract to secure whatever oil is left.
In turn, that should see a major spike that could close the gap we’re seeing between the futures and physical market. In short, think of the 21 April deadline as the final offramp on a highway before a massive traffic congestion up ahead.
So, strap yourselves in. This wild roller coaster ride may yet continue if we don’t hear of anything good in Islamabad this weekend.
This article was written by Justin Low at investinglive.com.
