Crude Oil at $100 Gets All the Attention. Watch These 5 Charts to Track the Energy Market Mechanics Behind the Headlines.

The price of crude oil gets most of the attention, but price is only one part of the equation. When supplies tighten, the next question investors should be asking is much more basic: 

What does it cost to get another barrel where it needs to go?

That question has become increasingly important as the escalation between the U.S. and Iran raises the possibility of disruptions to Middle East energy flows. Oil (CBX26) above $100 a barrel gets the headlines, but underneath that headline is a market dealing with tighter supplies, declining inventories and a much more expensive transportation system.

This is where I think the shipping market provides an important piece of the puzzle.

Crude doesn’t move from the oil field to the refinery by itself. It requires ships, available routes, and sufficient tanker capacity. When any of those become constrained, the delivered cost of oil rises — even if the underlying price of crude hasn’t moved by the same amount.

3 Charts to Follow the Cost of Moving the Barrel

Tanker rates have become one of the more interesting indicators to watch. Moving crude from the Middle East to Asia has become substantially more expensive as geopolitical risk increases and shipping routes become more complicated. But this isn’t strictly a Middle East story.

U.S. Gulf producers increasingly depend on international shipping to reach Asian customers, and the economics of that trade can be heavily influenced by the availability and cost of tanker capacity.

The Panama Canal is another piece of the equation. Drought conditions in the canal region have periodically reduced the number of vessels able to transit efficiently, creating another obstacle for energy moving between the U.S. Gulf and Asia. When a ship can’t take the most efficient route, the alternative is usually a longer voyage, greater fuel consumption, and more time tied up in transit.

Those additional costs ultimately have to be paid by somebody.

And that is why the shipping charts accompanying this article are important. 

#1. The Breakwave Tanker Shipping ETF (BWET) gives us a market-based view of tanker freight rates: 

#2. Scorpio Tankers (STNG) provides a look at the equity performance of a major tanker operator. 

#3. Finally, SonicShares Global Shipping ETF (BOAT) gives us a broader perspective on publicly traded shipping companies.

Rather than looking at these securities in isolation, I view them as another way of listening to what the physical energy market is telling us.

Strategic Reserves Can Buy Time, But Not Solve the Problem

There is, however, an important cushion available to the market: strategic petroleum reserves.

Strategic reserves can temporarily add supply when commercial inventories are under pressure. That additional supply can help prevent an immediate and potentially disorderly rise in crude prices.

But there is a difference between meeting today’s demand and replacing tomorrow’s inventory.

If strategic reserves are drawn down, those barrels eventually have to be replaced. And replacing them could become considerably more expensive if crude supplies remain tight and transportation costs stay elevated.

This creates an interesting dynamic. A drawdown of strategic stocks can temporarily ease the pressure on the market, but it doesn’t eliminate the underlying supply problem. In some respects, it simply moves part of the problem further down the road.

For that reason, I believe inventory data deserves considerably more attention than it often receives. The important number isn’t simply how much oil is available today. It’s whether the market can economically and reliably replace what it is consuming.

The Futures Market Is Adding to the Message

The structure of the futures market is another piece of evidence worth watching.

When nearby crude contracts (CLV26) begin commanding a larger premium over later deliveries, the market is telling us that immediate supply has become more valuable. Stronger Brent and WTI spreads therefore deserve attention alongside outright crude prices.

This is an important distinction. A geopolitical headline can push crude higher for a day or a week. But when the physical market, inventory picture, futures curve and freight market begin moving in the same direction, I pay much closer attention.

That’s when the market may be telling us that this isn’t simply a headline-driven rally. It may be a supply-and-logistics problem.

China Adds Another Variable

China could add another layer to the equation. If Chinese crude purchases continue to strengthen, additional demand would arrive at precisely the time when the market is already wrestling with tighter available supplies and elevated transportation costs.

At the same time, refined products such as diesel remain an important part of the story. Tight product inventories and declining Russian exports can place additional pressure on refiners and consumers, particularly if crude and freight costs remain elevated.

That combination matters because energy inflation doesn’t stop at the refinery gate. Higher costs for crude, refined products, and transportation can eventually work their way through the broader economy.

What Should Traders Watch?

For me, this comes back to a simple trading principle: don’t try and tell the market what to do; listen to what it is saying.

Right now, there are several signals worth listening to.

Watch commercial crude inventories. Watch strategic reserve levels and, eventually, the effort required to rebuild them. Watch Chinese purchasing. Watch the Brent and WTI spreads.

But don’t overlook the ships.

Tanker rates can provide an early indication that the physical movement of crude is becoming more difficult or expensive. The performance of tanker companies can provide another market-based confirmation, while the broader shipping complex can tell us whether investors are recognizing the same trend.

Bottom line: the critical issue isn’t simply whether crude remains above $100.

The bigger question is the cost of replacing the barrel once it is gone.

If Middle East production continues to reach the market and alternative suppliers can fill the gaps, the system may absorb the disruption. But if physical flows become more restricted, the combination of tight crude, declining inventories, and rising transportation costs could create a much more significant problem.

For traders, that means the next important signal may not come from the crude chart alone. It may come from the cost of getting a barrel to market.

– John Rowland, CMT, is Barchart’s Senior Market Strategist and host of Market on Close.

On the date of publication, Barchart Insights did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.