Commodities | 2:46 PM
Despite an overnight retracement following a sharp spike, energy markets remain on edge with implications for the global economy.
-Recent developments impacting the oil price
-Markets underestimating systemic risk, says Jarden
-How high can oil and LNG go?
-Which ASX-listed oil exposures benefit most?
-Updated energy pricing forecasts
By Mark Woodruff
What happened between Friday morning and Monday afternoon has instantaneously become part of financial market's legendary tales, the kind seasoned traders will tell their grand kids long after retirement:
I was there. Saw it with my own two eyes.
Hell, they might have even made money out of it (or not).
On Friday morning, Brent oil futures changed hands around US83/bbl. By Monday afternoon, Sydney time, those futures rallied to US$119.50/bbl. Within a flash they were back at US$86/bbl.
Investors had woken to reports G7 nations were planning a call to discuss releasing strategic oil reserves to offset potential supply disruptions.
US President Donald Trump and Secretary of State Marco Rubio said Washington had a clear plan in place, with Trump later suggesting the conflict, otherwise known as war in Iran, could end sooner than previously expected.
Indicating the timeline may be shorter than the earlier four-to-five-week guidance, the President added Iran may be running low on missiles and vessels were beginning to move more freely through the Strait of Hormuz.
Having reached a low of US$83.66, Brent crude is trading around US$89.00 at the time of writing.
In between, global equity markets followed the lead, first down sharply, as oil pricing surged, then a strong recovery rally on the back of the sharp fall in price.
Markets underestimating systemic risk to global energy stabilty
Given disruption in the Strait of Hormuz from the US/Israel–Iran conflict effectively strips around -20% of global oil and LNG supply from the market immediately, energy sector analysts at Jarden made the call equity markets were dangerously underestimating the systemic risk to global energy stability.
With traffic through the world’s most critical energy chokepoint collapsing toward zero, investors were at risk of interpreting a profound supply shock as a temporary delay.
All that changed on Monday, see above, when the US administration and G7 leaders stepped up to calm a market that had, finally, grasped the seriousness of the emerging situation.
So why the muted market reaction up until Friday? Jarden suspects a general “boy who cried wolf” mindset, after years of Middle Eastern false alarms.
In addition, high inventories in China and Japan, coupled with optimistic US rhetoric about the war being “ahead of schedule”, might also have temporarily cushioned sentiment.
As we all found out yesterday, Jarden's warning proved prescient, with global gas prices surging after the closure of the Strait of Hormuz constrained around -21% of global LNG supply and QatarEnergy halted production at its 77mtpa Ras Laffan hub.
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