Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / How Brent Is Surging Past WTI on Iran Strait Risk
Transcript
- Lucas: So Brent crude is now trading at just over 89 dollars a barrel. That's up about 6 percent over the past five days. Meanwhile, WTI, the US benchmark, is sitting closer to 83 dollars. The gap between them is widening fast, and it's almost entirely about one thing: the Strait of Hormuz. Luna: We saw the headlines this morning — ships are shunning the strait as renewed fighting strains that key corridor. But why is Brent feeling it so much more than WTI? Lucas: Right, that's the core question. Brent crude is priced in the North Sea, but it's a global benchmark that reflects seaborne crude from the Middle East, Africa, and Europe. A huge chunk of the world's oil moves through the Strait of Hormuz — about 20 million barrels a day. When tankers start avoiding that route, the cost of moving that oil spikes, and Brent prices in that risk. Luna: And WTI is priced at Cushing, Oklahoma. It's landlocked and mostly tied to US production from the Permian Basin. So it's insulated. Lucas: Exactly. WTI doesn't care about Hormuz in the same way. What's interesting is that this spread — Brent over WTI — is now around 6 dollars, which is the widest it's been since early this year. And it's not just about the headline risk. There are real mechanical factors at play. Luna: Like what? Insurance? Tanker availability? Lucas: Both. War risk premiums for tankers transiting the strait have gone through the roof. Some insurers are charging as much as 1 percent of the vessel's value per voyage now. That's a huge cost. And a lot of shipowners are simply refusing to go in. So the effective supply of tankers available to move Middle Eastern crude is shrinking, which pushes Brent higher. Luna: And that's not a temporary blip. The fighting resumed over the weekend, and the headlines suggest we're in for a sustained period of disruption. Lucas: Right. The CNBC story this morning said ships are shunning the strait. That's not a one-day thing. Every day that passes without normal traffic, the supply chain tightens. Now, the US is a net exporter of crude, so WTI isn't feeling that pinch. But for Europe and Asia, which rely on Middle East crude, Brent is the price they pay. Luna: So what does this mean for the energy sector? We're seeing stocks like Chevron up 4.4 percent over the last five days, ConocoPhillips up 3.4 percent, Exxon up 2.3 percent. Is the market betting that higher oil prices stick? Lucas: It looks that way. The XLE, the energy sector ETF, is up 1.7 percent today. But it's not a uniform story. The integrated majors benefit from higher Brent because they have global exposure. A company like ConocoPhillips, which is more us centric, still benefits but maybe less directly. That said, if the spread stays wide, it could incentivize more US exports — which would actually help tighten the global supply and lift WTI too over time. Luna: Interesting. So the spread itself could become a self-correcting mechanism? Lucas: Potentially, yes. If Brent stays high relative to WTI, US refiners and exporters will want to send more crude overseas. That eventually pulls WTI higher. But there's a limit — US export capacity is constrained by pipelines and port infrastructure. So the spread could persist for a while. Luna: Let's talk about the broader macro picture. We saw the CPI data this month came in at 332.6, down from 333.98. Inflation is cooling. But with oil prices spiking, does that threaten the disinflation narrative? Lucas: It's a real risk. The 10-year breakeven inflation rate ticked up to 2.25 percent from 2.24. That's small, but it's moving in the wrong direction. Energy costs feed into everything — transportation, manufacturing, heating. If Brent stays above 90 dollars for an extended period, it could start showing up in core inflation metrics. The Fed will be watching closely. Luna: Jamie Dimon recently said markets underestimate risks and he wouldn't buy stocks or Treasurys at current prices. Do you think the oil spread is part of that risk he's talking about? Lucas: Probably. Dimon has been warning about geopolitical risk for years. And this is exactly the kind of scenario that's hard to price — a sudden supply disruption that doesn't follow a neat model. The bond market might be complacent because core inflation is still trending down, but a sustained oil spike could change that calculus. Luna: So where do you see the spread going from here? Can it widen further? Lucas: It could. If the situation in the strait escalates — more attacks, longer disruptions — Brent could easily push into the low 90s while WTI lags. But there's also a ceiling. At some point, high prices destroy demand. And we've seen strategic reserves released in the past. The Biden administration hasn't signaled that yet, but it's an option. Luna: And what about the other commodities? We're seeing gold at 4,072, up 2.2 percent over five days. That's a safe-haven move. Copper is at 6.48, up 3 percent. Silver up almost 6 percent. It's not just oil. Lucas: Absolutely. Geopolitical risk tends to lift all precious metals. Gold is the classic hedge. But copper is interesting — it's up because of supply concerns too, but also because of expectations that infrastructure spending and electrification will drive demand. The war adds a layer of uncertainty that supports prices across the board. Luna: We should note that corn is also surging — up 7.3 percent over the past five days. That's a big move. Is that related to the Iran situation? Lucas: Indirectly. Corn is more about weather and supply forecasts. But there's a ripple effect: higher energy prices raise input costs for farming — fertilizer, fuel — and that can push grain prices higher. Also, if the conflict disrupts shipping in the Black Sea region, that's another channel. But corn's move this week seems more tied to domestic crop conditions. Luna: Right. We covered that in a previous episode. So focusing back on crude — what's the one thing a listener should take away from today's conversation? Lucas: The brent wti spread is the cleanest signal of geopolitical risk in the oil market right now. It's telling you that the market is pricing in a real disruption to Middle East supply, while US crude remains relatively insulated. If you're watching energy markets, that spread is the number to track. Luna: And if you're watching the economy, it's a reminder that inflation isn't dead yet. A shock like this can reignite price pressures. Lucas: Exactly. And honestly, if walking through the economy with us has made something click — if today's episode was worth a coffee to you — that's the link: buy me a coffee dot com slash fexingo. It's the smallest thing that keeps this show ad-free and independent. Luna: Yeah, we really appreciate those who chip in. It makes a difference. Lucas: So keep an eye on that brent wti spread. We'll be back tomorrow with more on how these commodity moves are rippling through the broader markets.