Tension still surrounds the Middle East; the threats of further supply disruption are very much elevated, but oil prices came off the day’s peaks as conflicting reports on the volume of oil passing through the Strait sowed the seeds of confusion. Shipping data, as reported by Reuters, showed six vessels transiting the waterway on Wednesday and four yesterday, contrasting with the US vice president’s estimate of 15 million barrels leaving the region two days ago. Meanwhile, Iraqi crude oil exports in August are set to rise by 1 mbpd.

Early price support came from Israel, where the country’s far-right defence minister threatened to cripple Iran’s military and energy infrastructure should its adversary attack it. The wind was then taken out of the bulls’ sails as the Russian president hinted at his willingness to start peace talks with Ukraine, something that, at this point, appears, well, perhaps not absurd, but hard to believe.

Nerves in the financial markets have also been calmed by comments from Fed Governor Christopher Waller, who believes that a possible cooling of inflationary pressure in the near future might warrant keeping interest rates unchanged at the next policy meeting. That was all equity and bond investors needed to reverse the recent sell-off. Stocks rallied, while bond yields dropped.

Yet, risks remain: further escalation in the Middle East will sour the mood once again, while signs of de-escalation will push oil prices lower and equities further up. In the present unpredictable trading environment, the inverse relationship between oil prices and stocks and bonds seems to be the only constant.

It is the Refined Products, Stupid

Under the pretext of the phenomenal performance of product futures contracts over the last six months, it is intriguing to take a thorough look at how CME Heating Oil, RBOB and ICE Gasoil futures have performed relative to the main crude oil benchmarks over the very long run, going as far back as 2006. The results are telling.

To begin with the conclusion, as investment tools, refined products are much more attractive than crude oil. It is probably stating the obvious, as refinery feedstock in itself is a relatively worthless commodity; its value lies in the selling price of whatever can be produced from it. The returns over the last 20 years support this statement. Product futures have far outperformed crude oil. The winner is ICE Gasoil, with a return of 270%, followed by CME Heating Oil at 214%. Every dollar invested in RBOB in 2006 would now be worth $2.93. Crude oil futures are seriously lagging. Brent has produced a return of 79% over the period examined (July 2006 to August 2026), while WTI, perhaps surprisingly, registered a slight loss of 12%.

These long-term results have been markedly affected by the structure of the individual contracts, as expressed in the amount of extra profit or loss generated when rolling a position from the expiring month into the next one (which, in our formula, is done on the penultimate trading day before expiry). In dollar-per-barrel terms, the winner is RBOB, which yielded an extra profit of $144, followed by Gasoil at $139 and Heating Oil at $82. In Brent, the rollover produced $44 over the last 20 years, while WTI remained in contango, resulting in a cumulative loss of $21. Once again, stronger product structures, or deeper backwardation, are another sign of the importance of products relative to crude oil as an investment tool.

In fact, according to the statistical evidence above, it is the roll yield that is the main contributor to the superior performance of products. The steeper backwardation in products probably reflects their higher value relative to crude oil. After all, at times of scarcity, switching between crude oil grades might ease a shortage, but when there is no jet fuel available, aeroplanes will not take off, and when there is a gasoline shortage, cars will not move. A good example is the US hurricane season. Devastating tempests can affect both oil production and refinery operations simultaneously, but it is usually the products that come into focus and receive a more significant price boost. To use fancy terminology, the convenience yields of refined products – i.e. the non-monetary advantage gained from holding them in stock – are much higher than those of crude oil.

The combination of rising oil demand over the decades, the financialisation of futures markets and, undeniably, occasional but severe spikes in geopolitical tensions near oil-producing regions and refining centres has had a profound impact on both outright prices and crack spreads, or refining margins. The average value of the CME 3-2-1 crack spread was $6.62/bbl between 1997 and 2006, compared with $21.38/bbl between 2006 and 2026. The improvement in the ICE Gasoil/Brent spread has been $12/bbl, as it rose from $5.93/bbl to $17.86/bbl.

The ratio of product prices to crude oil prices (product price divided by crude oil price) has remained comparatively stable over the years. The range has consistently been between 1 and 2, whether comparing Heat or RBOB with WTI, or Gasoil with Brent. Yet, as observed above, absolute price differentials have kept widening, and crack spread values have increased even five- or sixfold, as in the case of Gasoil/Brent or Heating Oil/WTI. Flat price has been diligently tracking the changes in refining margins.

No war or geopolitical conflict is the same, yet the current ones – Russia’s war against Ukraine and the Persian Gulf crisis – have fit the trend described above: products are more discernibly affected than crude oil. No doubt, once the nightmares are over, there will be a massive correction in outright prices as well as in crack spreads. If, however, oil’s long-term future remains intact and demand for the black stuff proves resilient, it is impossible to turn negative on refining margins. And one final, but related thought: the weightings of assorted oil indexes are predominantly based on physical production and demand. Past performance, which is admittedly not an indication of future results, nonetheless suggests that placing more emphasis on products would produce a more attractive return.

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