Think fuel shock, not oil shock

JPM continues its superb coverage of the Iran energy shock.

Oil is fundamentally a physical market—constrained by logistics, refining capacity, and inventories that can periodically create sharp dislocations—yet it is also one of the world’s most informationally efficient markets. Oil prices absorb enormous amounts of information with remarkable speed. That raises an important question: how should we interpret Brent averaging only about $100 in the two months since the war began despite the largest supply disruption on record?

Rather than signaling complacency, the market may be acknowledging a harsher reality: a shock of this magnitude cannot be absorbed through the crude market alone. There is simply not enough elasticity on the crude side of the system. Instead, the adjustment is increasingly being pushed down the barrel—out of crude and into refined products. Crude shortages have already forced refiners across Asia and Europe to cut runs by 2.1 mbd in March and 3.8 mbd in April. At the same time, the market has also lost an estimated 4.7 mbd of refined product exports from the Middle East itself. The result is tightening not only in crude balances, but increasingly in the availability of usable fuels like gasoline, diesel, jet fuel, LPG and naphtha.