I don't love the price action in oil at the moment.
For one, it highlights the lingering risks around a peace deal in Iran. The market briefly shuddered on a report that said it could take six months to do the deal. Now presumably the broad contours are agreed before then and the Strait of Hormuz is open but that's no guarantee. There's also the risk that negotiating tensions are high and that ships avoid the route or can't be insured during that period.
Alternatively, the oil market could just be showing physical tightness.
There are two participants in the crude market: Speculators and physical buyers. The specs drive the headline moves and try to front-run where the marginal price of a barrel will land. That isn't easy, and it's particularly hard when 13 million barrels are taken out of the market.
My fear is that we're starting to see signs of physical tightness that leads to a persistent bid. There was a story yesterday of physical barrels selling for nearly $200 in Sri Lanka and that highlights how hard it is to destroy demand. This also doesn't look like just a delivery issues as June crude is also up $3.37 today (though if you go further out the curve, December is up just 27-cents).
I don't like the way that price action today has steadily risen. To me, that's more of a telltale sign of physical demand and there's the risk that specs have mispriced the shortage and that +$100 (and potentially much more) is coming on supply bottlenecks even if Hormuz is opened next week.
Also worrisome is how Treasury yields are rising with this latest move in oil. US 10-year yields are up 3.2 bps to 4.91% and at the highest levels of the day.
