The nearby premium chart is the clearest expression of this tension I've seen from the financial side. After a decade in commodity trading and risk management, I'd add one dimension that makes the picture even more acute than the futures curve suggests.
The backwardation you're showing — front-month versus next year — is the paper market's version of tightness. The physical market is telling a more extreme story. Dated Brent, which reflects what refiners actually pay for cargoes loading within the next few weeks, is trading above $130. Front-month futures are around $101. That spread — above $30 — has no precedent in the history of the Platts assessment dating back to 1987. BMI analysts confirmed this week that futures are "struggling to provide a stable signal of underlying market conditions."
Why does this matter for your bond yield thesis? Because the transmission from oil into bonds and other assets runs through physical delivery costs, not through futures settlement prices. Refiners buying physical crude at $130+ are passing those costs into diesel, jet fuel, and gasoline at prices the futures curve doesn't capture. The inflationary impulse embedded in the real economy right now is significantly larger than what Brent futures imply.
On the "passage of hundreds of ships" point — important context. The US cleared a narrow safe lane under Project Freedom south of the normal Traffic Separation Scheme. But the same day Defense Secretary Hegseth announced the corridor, Naval Forces Central Command warned the normal route remains "extremely hazardous" due to unsurveyed mines. And Iran laid a second round of mines on April 23. The ship movements are real but they're escorted, limited, and operating through a corridor that experts have called unsustainable at current force levels.
Your observation that Brent is down on the week despite missiles and naval engagements is sharp — the market is pricing diplomatic probability. But there's a structural floor under physical prices that diplomacy can't remove quickly. Mine clearance takes months. Insurance reclassification operates on quarterly committee cycles at the P&I clubs — zero of twelve have reclassified. Even a signed agreement tomorrow doesn't normalize physical flows for 60-90 days minimum, and the five arbitrage mechanisms that normally close the physical-paper spread are all still broken simultaneously.
The bond market is full of oil, as you say. It's fuller than the futures curve admits.
The nearby premium chart is the clearest expression of this tension I've seen from the financial side. After a decade in commodity trading and risk management, I'd add one dimension that makes the picture even more acute than the futures curve suggests.
The backwardation you're showing — front-month versus next year — is the paper market's version of tightness. The physical market is telling a more extreme story. Dated Brent, which reflects what refiners actually pay for cargoes loading within the next few weeks, is trading above $130. Front-month futures are around $101. That spread — above $30 — has no precedent in the history of the Platts assessment dating back to 1987. BMI analysts confirmed this week that futures are "struggling to provide a stable signal of underlying market conditions."
Why does this matter for your bond yield thesis? Because the transmission from oil into bonds and other assets runs through physical delivery costs, not through futures settlement prices. Refiners buying physical crude at $130+ are passing those costs into diesel, jet fuel, and gasoline at prices the futures curve doesn't capture. The inflationary impulse embedded in the real economy right now is significantly larger than what Brent futures imply.
On the "passage of hundreds of ships" point — important context. The US cleared a narrow safe lane under Project Freedom south of the normal Traffic Separation Scheme. But the same day Defense Secretary Hegseth announced the corridor, Naval Forces Central Command warned the normal route remains "extremely hazardous" due to unsurveyed mines. And Iran laid a second round of mines on April 23. The ship movements are real but they're escorted, limited, and operating through a corridor that experts have called unsustainable at current force levels.
Your observation that Brent is down on the week despite missiles and naval engagements is sharp — the market is pricing diplomatic probability. But there's a structural floor under physical prices that diplomacy can't remove quickly. Mine clearance takes months. Insurance reclassification operates on quarterly committee cycles at the P&I clubs — zero of twelve have reclassified. Even a signed agreement tomorrow doesn't normalize physical flows for 60-90 days minimum, and the five arbitrage mechanisms that normally close the physical-paper spread are all still broken simultaneously.
The bond market is full of oil, as you say. It's fuller than the futures curve admits.
Great points. Thanks for writing. One reason I write these essays is to create exactly this type of dialogue.
Appreciate that. The physical-financial transmission is one of the most under-covered dynamics in this crisis. Looking forward to the next letter.