This year has highlighted a growing disconnect between the prices shown in crude oil futures contracts and the actual cost of physical oil, raising questions about the usefulness of futures as a market benchmark. Data from Argus Media Group indicate that Brent crude futures currently trade at only about 60-70 percent of the landed crude price in Asia, compared to around 90 percent in normal conditions. Meanwhile, the futures price amounts to just half the cost of diesel, a significant drop from the usual 80-90 percent ratio.

Historically, the spread between spot prices for Brent crude and futures has been relatively narrow. Between 2007 and 2019, the standard deviation of this gap was around $1 per barrel. This year, however, that figure has surged to nearly $8 per barrel, surging above $20 in September, reflecting futures markets’ increasing inability to capture the realities of physical oil supply and demand. These differences do not yet factor in sharply higher shipping costs, which have surged five to tenfold since before the Iran conflict, pushing Atlantic basin crude prices landing in Asia to five times prewar levels.

The value of a barrel of oil now depends heavily on its location, timing, and how easily it can reach refining centers, complicating pricing further. Although flows of crude through the Strait of Hormuz have improved from a low of around 2 million barrels per day in April to approximately 11 million barrels per day recently, total Middle Eastern flows remain about 2.5 million barrels per day below prewar levels. Constraints on vessel availability and longer, more complex shipping routes mean that oil passing through Hormuz does not necessarily translate into readily available supply for refiners.

Market participants also face challenges as futures contracts have become less reliable for hedging, partly due to geopolitical factors and policy-driven market sentiment. According to available data, persistent pressure from the U.S. government aimed at lowering oil prices, particularly ahead of elections, has discouraged traders from holding long positions despite a global crude stock depletion of some 650 million barrels since the conflict began. This has left markets vulnerable to algorithm-driven trading and bearish news, further decoupling futures prices from physical market conditions.

Additionally, the increase in flows through Hormuz is primarily supported by costly ship-to-ship transfers, which maintain elevated shipping costs. This reliance raises the baseline for freight rates and consequently keeps fuel prices, including gasoline and diesel, at historic highs. The bottleneck in global refining capacity outside China, compounded by ongoing attacks on Russian refineries and the closure of export-focused plants in the Middle East, has significantly constrained product availability. As a result, prices for refined products such as gasoline, jet fuel, and diesel have traded at twice the cost of crude in recent months—an unprecedented divergence.

Experts emphasize that inflationary pressures are driven more directly by fuel products than by crude oil prices. Traditionally, crude prices have served as a proxy for product price movements because they generally moved in tandem. However, this correlation has now collapsed. Notably, U.S. 10-year Treasury yields have correlated more closely with diesel prices rather than crude prices since May, underscoring the growing disconnect.

In response, the U.S. government has shifted its focus toward stabilizing diesel prices, recognizing that efforts to suppress crude futures prices have not prevented broader inflationary impacts. Some analysts suggest that predictions of oil reaching $200 per barrel during the current geopolitical tensions were not necessarily incorrect, but rather that futures contracts were the wrong financial instrument to measure or hedge against the real costs faced in the physical oil market.