Tight market and a fifth year of physical deficit push rates up
Markets are feeling the squeeze as a persistent physical deficit stretches into its fifth consecutive year. That ongoing shortfall between supply and demand is putting upward pressure on rates across the board, squeezing margins and forcing buyers and sellers to rethink strategies.
What’s causing the continued deficit?
- Supply constraints: Limited new production capacity and cautious investment have left supply unable to keep pace with demand growth.
- Strong demand: Recovery in key consuming sectors and structural shifts in consumption patterns are keeping demand elevated.
- Logistics and storage limits: Transport bottlenecks and lower inventories reduce the market’s ability to smooth short-term shocks.
- External shocks: Weather events, geopolitical tensions, and policy changes periodically tighten physical availability further.
How rising rates are showing up
With the market tight for several years, rate increases are visible in multiple ways. Spot prices spike more often, long-term contracts are being reset at higher levels, and premium payments for prompt delivery are becoming common. These higher rates affect both producers and consumers differently:
- Producers can benefit from stronger margins but face pressure to invest in capacity while managing higher operating costs.
- Buyers must absorb or pass on increased costs, which can erode competitiveness or squeeze end-user demand.
- Traders and intermediaries see wider spreads and more arbitrage opportunities—but also greater volatility and risk.
Business impact and market signals
Continuing deficits and rising rates send clear signals to market participants. Inventory rebuilds become a priority, contract terms are shifting toward greater flexibility, and hedging activity typically rises. Companies that act early to secure supply or lock in favorable terms are better positioned to manage costs.
Practical steps firms can take
- Diversify supply chains: Reducing reliance on a single source helps soften the impact of local shortages.
- Use flexible contracting: Blending spot and term contracts can balance price certainty with market access.
- Hedge selectively: Financial instruments can protect margins, but they should match operational exposure.
- Improve demand management: Efficiency gains and product adjustments can reduce vulnerability to price swings.
Outlook
If the physical deficit continues, expect rates to remain elevated and volatility to persist. The market may only loosen once new supply comes online, inventories recover, or demand softens. For now, businesses that plan for tighter conditions and build resilience will navigate the cycle more successfully.