Good morning. Oil futures are hovering around US$100. The price of a physical barrel of oil has been north of $140. In focus today: Which price matters?

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What it means when oil prices split between now and the future

Brent crude has risen and fallen on escalating U.S.–Iran tensions and a ceasefire. But with tanker traffic still halted through the Strait of Hormuz, The Globe’s Jeffrey Jones reports, physical oil prices have surged toward US$150, exposing a widening gap between futures markets and real supply.

What explains that gap – and which price carries through to the economy?

Oil futures

Or “paper barrels,” are contracts that represent what traders believe oil will soon be worth.

A trader buying a contract for delivery in June is taking a position on where prices will settle over the coming weeks, weighing the disruption against the release of emergency reserves, falling fuel consumption and the possibility that flows resume.

The price embedded in that contract reflects an expectation that current shortages ease even as the U.S. blockade on Iranian ports and renewed threats from Tehran are straining a week-old ceasefire agreement.

Physical barrels

Those futures contracts are overwhelmingly bought and sold before any delivery takes place, as traders exit positions at a profit or loss rather than taking possession of actual oil. (Although, it’s fun to imagine a bunch of barrels being rolled down Bay Street.)

The pricing of physical barrels is driven by the amount of crude that can be delivered where it is needed, when it is needed. Locking in a future price does not ensure that a shipment arrives.

Refiners that lose expected cargoes must find replacements in that market, competing for a reduced pool of accessible supply, and prices rise as buyers bid for whatever oil can be delivered immediately.

That’s the “spot market” – a network of private trades between refiners, producers and trading houses negotiating for cargoes deliverable within days or weeks.

In a disruption, most paper traders have already cashed out on their positions, leaving the physical market to those who still require crude to keep refineries operating.

Those spot transactions set the cost refiners actually pay – costs that move quickly into fuel, transport and, ultimately, consumer prices.

The price of convenience

Under normal conditions, oil for immediate delivery trades at a modest premium to futures – a structure known as backwardation – reflecting the value of having barrels on hand. The disruption in the Strait of Hormuz has pushed that dynamic to an extreme.

The loss of roughly 10 million barrels a day of supply, according to the International Energy Agency, has created what traders describe as a “blowout” – shorthand for the gap between spot and futures prices. That is, the price for buying barrels right now instead of what traders think that price will be in several weeks.

“The longer that gap remains, the longer and more widespread the damage will be,” Jones told me.

What’s a world to do?

One of the largest disruptions to physical oil supply in recent history is already affecting fuel availability in exposed regions and is spreading through the global market. Yesterday, the IMF warned that the shock could push the world toward recession if high oil prices persist.

Canada and the U.S.

As an oil-rich country, Canada is largely insulated from a direct shortage of physical barrels because it is a net exporter. The United States, too, is protected from a direct supply shock by its position as a leading oil producer.