Three months, three prices for oil

Three dates are enough to see what happened in energy this year. On 30 April Brent passed 126 dollars a barrel. In early July it fell below 71, the lowest level since 27 February. On 23 July it was back at 105.

None of those moves had much to do with how much oil the world needs. They had to do with whether it can get where it is wanted.

What moves the price when demand does not change

The July fall came as more tankers exited the Strait of Hormuz and as there were signs of progress in talks towards a permanent agreement. The move back to 105 came right after renewed attacks on ships crossing those same straits and a threatened blockade of exports through the Bab el-Mandeb Strait.

Oil is not easy to store and it does not change route quickly. A cargo bound for Europe takes weeks, and the passages it must cross can be counted on one hand. When one of them becomes uncertain, the price does not wait to see whether it closes. The possibility moves it, not the event.

This is why commodities behave differently from shares. A share prices the profits of a company many years ahead. A barrel prices a delivery at a named port in a named month. The horizon is so short that every headline fits inside the price whole.

From the barrel to the supermarket basket

Energy enters inflation twice. First directly, through fuel and electricity. Then indirectly, through the transport and production cost of everything else, with a lag of months.

That is why central banks also watch core inflation, which strips out food and energy. Not because those prices do not matter to a household. Because they swing far and fast in both directions, and a monetary policy that chased them would change direction every month.

The second route is the sneaky one. When oil gets more expensive, transport gets more expensive, and a few months later so does yoghurt. When oil gets cheaper, yoghurt rarely follows it back down. Prices rise easily and fall reluctantly, and that asymmetry is why inflation tends to settle a little higher than anyone expects.

Why the pump does not follow the barrel

Many people expect to see at the filling station the same fall they read in the headlines, and come away disappointed. The reason is that the price of fuel is not the price of crude.

Inside what you pay there are three further components:

1. Taxes. A fixed amount per litre, which does not move at all when the barrel falls.
2. The refining margin. It depends on demand for petrol, not for crude.
3. Transport and the running cost of the station. Costs that do not follow international prices.

Crude is the largest single component, but it is not most of the price. So a 30% fall in the barrel shows up at the pump much smaller, and weeks later.

Why a portfolio does not need to forecast this

The Fed statement of 29 July referred explicitly to supply shocks that drove price increases, with energy named first. When the central banker admits that the cost is coming from the supply side, the message for an investor is not to guess the next price of the barrel.

It is that commodities move on their own logic, which is not the logic of company profits. A diversified portfolio already has energy exposure, through the oil majors and utilities the index holds. The Logifin ETF Hub shows clearly which funds give direct commodity exposure and which do not, while the guide to comparing ETFs explains what to check before adding anything extra.

What to take away

• A path from 126 to 71 and back to 105 in three months is not a buy or sell signal. It is a measurement of uncertainty.
• Energy reaches inflation twice, and the second pass arrives late. One month of cheap oil does not show up on the shelves right away.
• Economic indicators explain what happened. They are not built to say what happens next.