Commodities · Explainer
How oil prices are set, and why they feed straight into inflation
Benchmarks, freight and refining spreads sit between a barrel of crude and the price on the forecourt.
The short answer
- Brent and WTI are benchmark contracts, not the price of every barrel traded.
- Futures markets price expectations of supply and demand, not just today's balance.
- Crude is only part of a fuel price; refining, distribution and tax make up the rest.
When a news report cites 'the oil price', it usually means the front-month futures contract for Brent or West Texas Intermediate. These are specific grades delivered at specific points, and most physical crude trades at a differential to one of them reflecting quality and location.
Futures price expectations
A futures curve shows prices for delivery in successive months. When later months are more expensive than earlier ones the market is in contango, often implying comfortable supply; when the near months are dearer it is in backwardation, typically signalling tightness. The curve is a market opinion about the future, and it revises constantly.
What moves the balance
- Production decisions by major exporters and producer groups.
- Inventory data published by national energy agencies.
- Refinery availability, which determines how much crude can be turned into usable fuel.
- Freight rates and shipping route disruption.
- Currency: crude is priced in dollars, so the dollar's strength changes local costs.
The inflation channel
Energy enters inflation twice: directly through household fuel and heating, and indirectly as an input cost to transport, agriculture and manufacturing. The second channel arrives with a lag, which is one reason central banks separate core from headline inflation when judging the underlying trend.
Sources
- Petroleum & Other Liquids data — U.S. Energy Information Administration
- Oil market reports — International Energy Agency
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