Winds of changes in politics inevitably have a profound impact on everyday life and financial markets. And last week was absolutely and unreservedly awful – not price-wise but global security-wise. There was no significant development on the economic front, per se, and our market was also reasonably uneventful, perhaps apart from the brief interruption in oil output at the Johan Sverdrup oil field. However, no asset class was immune from factors that shaped the political world and these changes are, indeed, deemed nothing but ominous. After Donald Trump’s victory in the US election three weeks ago his attempt to form the new administration that will hit the ground running come January 20 is turning into a royal mess. We intend to look at the topic in tomorrow’s note. In Brazil, police indicted the country’s ex-president, Jair Bolsonaro and his allies for attempts to abolish the rule of law and for a coup d’état. Political turmoil in Brazil usually does not feature high on the list of investors’ anxiety. The move to charge the former right-wing president has not sent intolerable shockwaves through financial markets. Yet, it perfectly mirrors the fragmented political landscape that characterizes the past two years and embodies all the uncertainties and unpredictability investors are forced to deal with.

Of graver concern are last week’s events in the Middle East and Ukraine. The International Criminal Court (ICC) issued arrest warrants against the Israeli Prime Minister, Benjamin Netanyahu and the former defence minister, Yoav Gallant, whom Mr Netanyahu fired at the beginning of the month. The ICC alleges that the pair is responsible for ‘the war crime of starvation as a method of warfare; and the crimes against humanity of murder, persecution and other inhumane acts’. An arrest warrant for crimes against humanity and war crimes was also issued for the Hamas leader Mohammed Deif because of the attack on Israel on October 7, 2023, which claimed the lives of 1,200 Israelis. Israel condemned the ICC move in the strongest possible term and labelled it antisemitic. The Jewish state’s staunchest ally, the US, ‘fundamentally rejected’ the decision whilst the incoming administration was quick to emphasize that the ICC, with its 124 members, has no credibility.

When you consider that the US vetoed a UN resolution last week, which called for an immediate, unconditional and permanent ceasefire in Gaza and the immediate release of all the remaining hostages held by Hamas, the outlook becomes more troubling. The Security Council has 5 permanent members with veto power and 10 elected members. Of the 15 members 14 voted in favour of the resolution with the US being the odd one out. The point is that the ICC arrest warrants and the US objection to a Gaza ceasefire will prolong the current terrible status quo in the region and possibly even exacerbate it – a disturbingly conducive prospect for risk premium.

The situation in Ukraine is even more dire, it appears. The official US narrative states that the White House allowed Ukraine to strike Russia with its ATACMS missiles because of the deployment of North Korean troops to fight alongside the Russians to retake the Kursk region occupied by Ukraine in August. The precondition of the deal was that Ukraine would only use US missiles to defend Ukrainian forces in Russia’s Kursk region. By the decision, the US effectively supports the Ukrainian seizure of a piece of Russia, possibly as leverage for future negotiations. At the same time, one would suspect, that attacking Russian oil infrastructure remains a taboo.

A Russian retaliatory move was inevitable, especially since the UK followed in the footsteps of the US and allowed Ukraine to fire Storm Shadow missiles inside Russia. After approving a new doctrine by lowering the threshold for a nuclear response, Moscow, on Thursday, struck Ukraine with experimental hypersonic missiles, which targeted a facility in the country’s Dnipro region. After last week’s developments, the fitting soundbite, both in the Near East and in Ukraine, is escalation with unforeseeable consequences.

These repercussions, for now, have not impacted oil supply but oil prices finished the week more than $4/bbl higher. We suspect, that barring further increases in geopolitical temperature and direct impacts on oil production, the support provided by Israel and Ukraine will gradually dwindle. Mother Nature, on the other hand, could provide further help. We had dived deep into the natural gas landscape in two of last week’s notes and one cannot help but see the relative strength observed in the middle of the barrel, particularly in Europe. Gasoil and heating oil can be used as a substitute for natural gas, and it is noticeable how the ICE Gasoil/Brent spread moved from $15/bbl in the first half of November to nearly $20/bbl by the end of last week. The December/January Gasoil backwardation has widened from $2.25/ton to $7/ton during the last two weeks with the M1/M7 spread inflating from a contango of $2.75/ton to a backwardation of $18/ton during the same period. Net speculative length in ICE Gasoil has turned positive last week for the first time since July.

Wars usually put pressure on equities, after all their effects on economies are negative. Not this time around. Global stock markets remained buoyant, especially in the US. The ever-widening chasm between Europe and the US was all the more visible. It is the impact of the Trump trade, the initial enthusiasm triggered after election results, which entails massive deregulation in the US. Whether it is sustainable is a completely different, albeit salient question. Those who bet on renewed inflationary pressure precipitated by Trumponomics are of the view that we are witnessing a bubble growing bigger before bursting. As for oil, the conflict-escalations and weather are seen as temporary supportive phenomena. Of course, a continuous march higher in the current climate cannot and must not be ruled out but the underlying fundamental equation remains unchanged. The horrendous week just behind us helped both oil and stocks ascend but it is the top that appears to be closer and not the bottom.
 

Overnight Pricing