Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / How the Strait of Hormuz Toll Is Reshaping Oil Spreads
Transcript
- Lucas: So Brent crude closed today at just under 83 bucks a barrel. WTI, the US benchmark, settled under 78. That puts the brent wti spread at over five dollars — we haven't seen it this wide since the spring of 2020. Luna: And the trigger is pretty clear, right? The Strait of Hormuz is suddenly the biggest story in energy markets. Lucas: Exactly. Former President Trump proposed a 20 percent toll on cargo passing through the strait, and he's also restarting the blockade on Iranian shipments. That's a one-two punch that reroutes global oil flows — and the brent wti spread is the readout. Luna: For listeners who don't track these two benchmarks daily — give us the quick primer. Why do they diverge in the first place? Lucas: Sure. Brent represents crude from the North Sea, but it's really the global seaborne benchmark — it prices about two-thirds of the world's oil. WTI is the US landlocked benchmark, priced at Cushing, Oklahoma. Under normal conditions, the spread is usually a buck or two. Brent tends to trade at a slight premium because it's lighter, sweeter, and closer to major refineries. Luna: But when the spread blows out, it's almost always a geopolitical story. Lucas: Right. If the Strait of Hormuz gets disrupted, Brent barrels become more expensive to source because alternative routes are longer, riskier, or costlier. WTI, meanwhile, is produced and refined mostly within North America. It's insulated from that specific risk. So the spread widens as Brent jumps and WTI lags. Luna: And we saw exactly that today. Brent was up over 6 percent in the last five days. WTI up about 5 and a half percent — so Brent gained more. But tell me about this toll idea. Is it real policy or just campaign rhetoric? Lucas: It's real enough that markets are pricing it. The proposal is a 20 percent levy on all cargo transiting the strait. That's massive. About 20 million barrels of oil pass through the Strait of Hormuz every day — roughly a fifth of global consumption. A 20 percent toll would add, say, 15 to 20 dollars per barrel to delivered costs for buyers like Japan, India, South Korea. Luna: So suddenly Asian refiners are scrambling for alternative supply. That pushes up Brent directly. Lucas: Exactly. And the blockade on Iran — if enforced — takes another 1.5 to 2 million barrels a day off the market. That's supply that was already constrained. So you've got a demand-side shock from the toll and a supply-side hit from the blockade. The combination is exactly the kind of shock that blows out spreads. Luna: And it's not just oil. Natural gas is getting crushed — down over 10 percent in the last five days. Why the divergence? Lucas: Natural gas is a different animal. It's mostly shipped as LNG, but the US is the world's largest exporter now. The toll and blockade don't directly affect US gas production. And there's been a mild start to summer in the US — storage is above the five-year average. So gas is selling off even as oil rallies. It's a reminder that commodity markets aren't monolithic. Luna: You know, walking through these connections is exactly why we do this show ad-free. We don't have to twist the analysis to fit a sponsor's narrative. If you find that valuable, you can support the work at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. Lucas: Yeah, and it really does make a difference. Every contribution helps us keep the episodes independent and focused on what matters to you. Now, let's get back to that spread. One thing I want to highlight — it's not just about today's headlines. The brent wti spread is also a signal of how the market views medium-term supply security. Luna: Meaning if this toll stays on the table, we might see the spread persist at elevated levels, not just spike and fade. Lucas: Exactly. Look at the futures curve. Brent's backwardation — where near-term contracts are more expensive than later ones — has steepened noticeably this week. That's the market saying 'I want oil now, not later, because I'm worried about disruptions.' WTI's curve is also in backwardation, but much flatter. The market is essentially pricing a lower risk premium into WTI. Luna: And that makes sense if you think about the physical flows. If Asian refineries can't get Iranian crude, they'll bid up Brent-linked barrels from the North Sea, West Africa, or even the US Gulf. But US crude shipped abroad still has to compete with domestic refiners, so the price impact is muted. Lucas: Right. And here's a subtle point — the toll proposal, even if never enacted, has a pricing effect. Just the threat of it changes shipping routes. Tanker rates for voyages through the strait are already rising. Some shippers may start taking the long way around Africa, which adds cost and time. That gets priced into Brent immediately. Luna: And it's not just crude. Look at refined products — diesel, jet fuel. Those are also traded globally. If the strait gets disrupted, Asian refineries face crude shortages, which then push up product prices worldwide. Lucas: That's a good point. And we're already seeing energy stocks rally. The XLE — the energy sector ETF — is up almost 4 percent in the last five days. The XOP, which tracks exploration and production companies, is up 5 percent. Chevron gained 4.7 percent, ConocoPhillips 4.1 percent. The market is betting that higher oil prices will boost earnings. Luna: But not all energy stocks are created equal here. Some are more exposed to international crude prices than others. Lucas: Absolutely. Exxon, for example, has massive refining operations that benefit from both cheap WTI feedstocks and higher product prices. Chevron has extensive international production, so it benefits more from Brent. ConocoPhillips is mostly US onshore, so it's more levered to WTI. The divergence in their stock moves — Chevron up 4.7, Exxon up only 2 — reflects that. Luna: So if you're an investor watching this, the key question is: does the toll actually get implemented? And if so, how long does it last? Lucas: That's the multi trillion dollar question. A 20 percent toll would be a massive tax on global trade. It could push oil prices toward 100 dollars a barrel if sustained. But it's also a huge diplomatic escalation. The Strait of Hormuz is an international waterway under international law. Unilaterally imposing a toll is essentially an act of economic warfare. Luna: And the blockade on Iran — that's not new, but it was suspended under the Biden administration. Restarting it would take oil off the market that had been flowing again. Lucas: Right. Iranian exports had crept up to maybe 1.5 million barrels a day under relaxed enforcement. If that gets cut, opec plus has spare capacity — Saudi Arabia, UAE — but it's not all of it. And some of that spare capacity is heavy sour crude, not the light sweet that many Asian refineries prefer. So the mismatch could persist. Luna: What about the rest of the commodity complex? Are we seeing spillover effects? Lucas: Interesting you ask. Copper is up 3.7 percent in the last five days. That's partly a China demand story, but higher energy costs also make mining more expensive, which can support prices. Gold, on the other hand, is down 1.5 percent. That's a bit surprising given the geopolitical risk, but gold was already at 4,000 dollars an ounce. Maybe the market sees this as inflationary rather than a flight to safety. Luna: Higher oil prices feed into inflation, which could force the Fed to stay hawkish. That's bad for gold, which hates rising real rates. Lucas: Exactly. The ten-year breakeven inflation rate ticked up to 2.24 percent this week. That's still below the recent high, but if oil keeps rallying, it could push headline CPI higher. The May CPI reading was already 334, up from 332.41. A sustained oil spike would make that number look low. Luna: So bottom line — the brent wti spread at 5 dollars is a flashing red light for global oil supply risk. And the driver isn't a hurricane or a refinery outage. It's a policy proposal that may or may not become law, but the market is already acting as if it will. Lucas: That's the key takeaway. The spread is a real-time measure of how much geopolitical risk the market is pricing into different barrels. Today it's saying: global crude is under threat, American crude is relatively safe. Whether that persists depends entirely on what happens in the strait over the next few weeks.