Looking to the Futures
Monitoring the spread between Brent and Crude
Recent uncertainty regarding the Strait of Hormuz has caused significant price volatility in the energy sector, specifically oil and gas. While Crude (/CL) and Brent (/BZ) futures still sit at around a positive 90% price correlation from a trading perspective, the price gap has widened to its largest spread over the last eleven years.
This widening can be attributed to “risk premiums” placed on any type of oil transported via a waterway. It’s estimated that roughly 80% of all Brent Oil is moved via a waterway and the Strait of Hormuz sees one out of every five barrels from a global consumption standpoint pass through it. Crude Oil (/CL) is largely transported via land which contributes to this price disparity.
Following the U.S. and Israel strikes on Iran, which started in late February, we’ve seen surcharges added towards shipping costs ranging from an extra $1500-3000 per container. VLCC’s or Very Large Crude Carriers are pushing transport prices north of $400,000 per day through the Strait.
It was reported overnight that Iran accepted a 2-million-dollar payment to guarantee safe passage through the Strait of Hormuz from a company for one of its oil tankers, which suggests certain countries can still use the Strait. In response this morning the Trump Administration announced consideration of plans to impose a siege on Iran’s Kharg island. This island, located northwest from the Strait of Hormuz up the Persian Gulf, is Iran’s primary export terminal accounting for roughly 90% of exports.
U.S. Energy Secretary Chris Wright made comments overnight stating there will be releases of the Strategic Petroleum Reserves and that the oil will arrive at ports within three to four days. He further mentioned that sanctions on Iranian Oil would be absorbed from a price standpoint in the next 30-45 days.
Saudi Arabia’s oil officials released projections overnight stating base cases for Brent Crude (/BZ) oil prices. They cited supply chain disruptions and energy shocks being the main drivers of price action. Their base projections show Brent hitting $150 in early April and continued escalation/turmoil in the supply chain possibly pushing prices above $180 per bbl.
While Brent and Crude are similar products, it is important to notate some differences. They are both low density (light) and low sulfur (sweet) sitting at roughly 0.37% (/BZ) and 0.24% (/CL) content. Brent predominantly comes from the North Sea as Crude originates from the United States. Historically, Brent (/BZ) will trade at an ever so slight premium to Light Sweet Crude (/CL) due to higher shipping costs among water. As shipping costs rise, you will also see the price disparity rise which ultimately suggests that while price is still positively correlated Brent (/BZ) will have a Beta of greater than 1 in relation to Light Sweet Crude (/CL).
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