Friedrich Nietszche said that there is only one constant in the world – that is change. His words have universal relevance but this saying is also highly important and relatable to contemporary commodity markets. Oil prices, specifically, have taken wild swings in this month. Since 7th of March, Brent has lost almost $40 and WTI $30! Yesterday (15th of March) both benchmarks were down by 9 percent in a single day! Brent moved down to its 21 day SMA (Simple Moving Average) recently, for the first time since the invasion.
What exactly happened? Calls for extraordinary elevated oil prices were gaining momentum as Russian forces continued to assault Ukrainian cities. Brent went all the way up to $139 approaching the levels not seen since 2008 – but it settled down lower on the same day. The issue of sanctions spread the rumours that the Western allies will sanction Russia’s oil and gas sector too that sentiment kept the prices elevated. However, when Biden announced that it was only the U.S. that will be doing the aforesaid, market expectations were changed. They (the traders, observers, speculators) didn’t see anything drastic in this move and rightly so as U.S. only imports 600,000 bpd of Russian oil. With expectations regarding the increase in Shale production going strong with seven of the most highly producing basins expected to churn the highest output since March 2020. Overall, U.S. production is expected to touch 13 mbpd in 2023.
On the other hand, EU couldn’t afford such a step as doing so would have exacerbated an already serious energy crisis. We should also remember that this energy crisis did not eventuate after Russian invasion of Ukraine but was at its peak even before that. Gas prices were talking to the sky and household budgets were disturbed due to the rising living cost. Under such circumstances, it would have made no rationale or logic to precipitate an already present series of poly-crisis into one megacrisis (to use Adam Tooze’s phrasing that he mentions in his recent book Shutdown).
When this didn’t happen, the fear premium of war further decreased as no one could see a substantial disruption to global oil supply. Even before this war, it is important to mention here, there were estimates that raised concerns regarding an impending supply crunch. However, other realistic outlooks also pointed towards a 500,000 bpd supply. OPEC+ saw that and was wise enough to differentiate the panic between paper markets and physical one. Global crude oil on Water, we have continuously shown in our shows, remains on the high side suggesting no shortage of oil.
This was realized further when EU absolved Russian oil and gas sector from sanctions. The result? Oil prices tanked (relatively speaking) from $140 a barrel to less than $100 (today, 16th March). Without a deal with Venezuela which was being considered to get some extra oil online, without any increase in production from OPEC+, without any proper announcement of a ceasefire between Russia and Ukraine, oil prices plunged. I am mentioning this as I want to relate it to what I wrote back in the summers of 2021 (Why Oil Prices Won’t Touch $100). I maintained that fundamentally there is no reason that we should see a triple digit oil price. However, there was a caveat that I had categorically mentioned: it can happen in the case of a geopolitical conflict. I used the example of, say, a missile hitting a Middle Eastern refinery. But the point was that it was only the flare-up of a geopolitical flashpoint that would have caused an increase in prices to this extent.
Now that the factor has already been discounted and cashed in, we are seeing oil prices retreating towards the level where it was before with all the scares vis a viz issues in spare capacity, supply crunch etcetera (the usual). I believe, the stable and original (if there is such a thing) price of oil still lies between $70 to $80 barrels and we will see this price or even lower than that if the following happens: Successful Iran deal. I wrote about it in detail here in: Could Iran Deal Bring Oil Back Down? It was, of course, a rhetorical question. There is/was only one condition I.e. the timing of this. If this deal happens in the midst of a heightened tensions, then the news may get lost in the noise of the artillery. But if the announcement comes just when there is a serious chance of ceasefire, then we may see oil prices tanking substantially.
Fundamentally, Iran has already been smuggling oil to the markets but the point that I always emphasize is the value of sentiments. An annoucement of this mind will definitely affect the markets. Not only that but there will be some fundamental changes as well such as as per Kepler Iran can bring 60 to 85 million to onshore tankers and acording to different estimates can reach upto 3.3 mbpd within the first three months of lifting of sanctions and could hit 3.7 mbpd after 6 months. This is a substantial addition of barrels to upend the market sentiment.
Therefore, the case of a sell-off in oil markets remain highly feasbile. However, at the moment there is only one sentiment that will rule the markets for weeks to come: Volatility.
