Commodities are all about the balance struck between demand and supply at any given point in time.

That we must remember, we have a near-term market and then a forward market. The former is more vulnerable to near-term demand factors, because supply is unable to catch up in a short period. The latter is dictated more by long-term dynamics as companies have time to plan investment and boost capital expenditures accordingly.

But at any given point in the near term, if one has too much of a commodity — like in March 2020 when there was no place to store WTI Cushing oil — commodities can drop, even to a negative.

Conversely, if there is a shortage in the very near term, then retailers or consumers will pay whatever they can to source it — as we’ve seen with gas and electricity costs today. But the equation never remains the same; it is a dynamic one that changes as the path of demand and supply changes over time.

Demand is the key variable that most tend to “miss,” but then only adjust their numbers after the fact to reflect the fair value. Clearly that is not a very value-added approach to traders, who would rather be ahead of that change than after. Today, that is the situation in the oil market. There is no doubt that because after the Covid-demand surge, today we are in a situation where inventories of gasoline, distillate and products in general are quite low vs. the 5-year average. It is not about oil, as it is about products — that is what drives the economy either by heating oil, gasoline or jet fuel. The Ukraine war has exacerbated a tight product market that we faced at the beginning this year. It is safe to say that the oil market benefitted from a triple-whammy of factors that have led its price to $115 per barrel today. There are only bulls around and yet oil price is failing to make new highs, what is going on?

It is quite easy to see the supply shortage in oil today, especially in refined products. With such healthy margins, refiners are effectively “minting” cash today and of course will be cranking up their refineries hand over fist to capture these margins. China lockdowns have made matters worse as refiners have shut down due to its draconian Covid measures. But this is not going to last forever as China is slowly coming back at the end of this month. The latest data shown in the Department of Energy’s “Energy Weekly” saw refiners increase their throughput to 93.2%, highest in two decades. This just means that the system is slowly resetting itself to produce more products. It just takes time.

The more important question to ask is how will demand be going forward? Judging by how PMI and every macro-economic indicator in the U.S, E.U. and the rest of the world is falling right now, it suggests there is a real slowdown in the economy. U.S. consumers are stretched as inflation has hit disposable income, which would imply less driving demand or shorter trips this summer. The Fed is not going to “support” the market as everyone thinks it will as inflation, the Fed’s nemesis, is just too high around 8% year-over-year. This stress has been reflected in broader asset classes and will surely start to be felt in commodities, too.

Oil is driven by this so-called demand, and so it is just a matter of time it catches up. Demand, like things in life, is never a constant. Commodities can remain tight in a short period of time, but eventually enough time passes whereby one side of the equation always catches up.