Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Brent Crude Is Falling Despite Iran Conflict
Transcript
- Lucas: Brent crude is down more than nine percent over the past five trading sessions. That's the biggest weekly drop for the global benchmark in over a year. And it's happening while the US military is actively conducting strikes in Iran. Luna: Which is exactly the kind of headline that usually sends oil spiking. So what gives? Lucas: Right, the classic playbook says geopolitical tension in the Middle East equals a war premium in crude. But this week, Brent touched just over ninety-five dollars a barrel before falling back to about ninety-two. The market is basically shrugging. Luna: Is the Strait of Hormuz angle losing its punch? I saw General Petraeus said Iran is 'in the process of blinking' over the strait. Lucas: That's part of it. The market seems to be pricing in that a full blockade is unlikely. But there's a deeper structural story here. The real reason oil isn't rallying is that supply outside OPEC is surging. Luna: You're talking about the Americas. Lucas: Exactly. US crude production held above thirteen million barrels a day through April. Brazil and Guyana together added roughly five hundred thousand barrels a day year-over-year. That's new supply that didn't exist five years ago, and it's not subject to OPEC quotas. Luna: So even if Iran disrupts a few tankers, the global buffer is bigger than the market used to have. Lucas: That's the thesis. And you can see it in the futures curve. Brent's backwardation — the premium for immediate delivery over later months — has narrowed sharply. A month ago, the spread was over two dollars. This morning it's about sixty cents. Luna: That suggests traders aren't worried about an actual supply crunch. Lucas: They're not. In fact, the options market is telling us the opposite. The put-call ratio for Brent has climbed above one point two, which is the highest level since last October. More traders are hedging for downside than upside. Luna: Wait — even with active military strikes? That seems counterintuitive. Lucas: It does, until you look at who's buying the oil. China's crude imports in April were down about eight percent year-over-year. Their economy is still sluggish, and they're running down inventories. If the biggest buyer is stepping back, a supply disruption matters less. Luna: And Europe? They've been diversifying away from Middle Eastern crude since the Russia-Ukraine war. Lucas: Right. European refiners are taking more cargoes from the North Sea, West Africa, and the US. The share of Middle Eastern crude in European imports has fallen from about twenty percent in twenty twenty-one to around fourteen percent now. So the transmission mechanism from a Hormuz disruption to European pump prices is weaker. Luna: Which means the war premium is more of a headline risk than a real pricing factor. Lucas: Exactly. And the market is punishing anyone who tries to hold that premium. Every time Brent tries to rally above ninety-six dollars, sellers step in. There's a ceiling right now. Luna: But isn't there a tail risk? If the conflict escalates beyond limited strikes? Lucas: There's always a tail risk. But the options market suggests traders see that as a low-probability event. The implied volatility for Brent is around twenty-two percent — below its historical average of twenty-five. So the market is not panicking. Luna: We should also talk about what happens on the demand side. Are we seeing any signs of a slowdown? Lucas: A few. The latest US gasoline demand data showed a slight dip below the four-year average. Diesel demand in Europe is soft because industrial activity is still weak. And the IEA's latest monthly report trimmed its global demand growth forecast for twenty twenty-six to one point one million barrels a day, down from one point three. Luna: So modest demand growth meets robust non opec supply, and that's the fundamental picture. Lucas: That's the fundamental picture. And OPEC itself is sitting on about four million barrels a day of spare capacity, mostly in Saudi Arabia and the UAE. If prices did spike, they could flood the market quickly. Luna: Which is probably another reason traders aren't chasing this rally. Lucas: Right. The cartel has a credibility problem when it comes to cutting production. Their recent output cuts haven't fully held, and some members are cheating. So the safety valve is wide open. Luna: Let me ask a listener question that came to mind: If Brent is falling despite Iran strikes, what would actually make oil spike from here? Lucas: A few things. A direct hit on Saudi or UAE infrastructure. A full blockade of the Strait of Hormuz — which Petraeus called a 'blinking' scenario, meaning Iran would back down. Or a sharp supply disruption in another major producer, say a hurricane in the Gulf of Mexico. Absent that, the path of least resistance is lower. Luna: Lower meaning back to the eighty-dollar range? Lucas: It's possible. If non opec supply keeps growing at this pace and demand stays moderate, Brent could drift toward eighty-five by the end of the third quarter. The futures curve is already pricing in a gradual decline. Luna: Speaking of things that make sense of the world — we do this show ad-free thanks to listeners who support us. If walking through the economy with us has made something click, that's the link: buy me a coffee dot com slash fexingo. Lucas: It really does help. No pressure, just if today was worth a coffee to you. Anyway — back to the crude picture. Luna: So what about the impact on gasoline prices? Are we going to see relief at the pump? Lucas: Probably, but with a lag. The US average gasoline price is around three forty a gallon right now. If Brent stays in the low nineties, we could see that drop to three twenty by mid-summer. But refineries are also dealing with higher costs for renewable fuel credits and RINs, so the pass-through isn't one to one. Luna: And diesel? That's been a whole different story in previous episodes. Lucas: Diesel's divergence from crude has narrowed a bit. The crack spread — the profit margin for making diesel — is still above thirty dollars a barrel, but that's down from forty in April. So some relief, but not a collapse. Luna: One last thing: what about the impact on inflation? Lower oil should help the CPI. Lucas: It should. The April CPI came in at three hundred thirty-two point four, up from three thirty point three in March. Energy was a contributor. If oil stays lower, the May and June prints could show a moderation. The ten-year breakeven inflation rate is already at two point four percent, which is not alarming. Luna: So the bottom line: geopolitical drama, but the fundamentals say lower. Lucas: That's the takeaway. Watch the supply data from the Americas and the import numbers from China. Those will tell you more about where oil is headed than the next headline from the Strait of Hormuz.