Viewing the world via a cynical eye is never really constructive, but such is the manner in which our current geopolitical drivers exasperate us, that who can blame folk for consuming news with seasoned resignment. The salvo of air vehicle attack from Iran into Israel was about as telegraphed a world event that people can remember. Telling the US, the UN and anyone else that would listen that an Iranian strike does not mean escalation, just retaliation, was clue enough. The actual attack was hardly ‘shock and awe’, it was more like, ‘ready, steady, here they come’. The standard of manufacture and failure of Iranian hardware is another discussion, but if a surprise attack was meant then surely ballistic missiles would have been used first as they could travel the distance in minutes, rather than drones and cruise missiles, that at 500mph would take up to 2 hours to reach targets. They might as well have a big disco lights on them and tow banners with ‘come on ladies and gentlemen, please shoot me down’.

Oil prices do not think much of the attack judging on the price range travelled today. The old adage of ‘buy the rumour, sell the fact’, is seen by how the new year-to-date high in Brent on Friday of $92.18 was only partially made up with the morning high print of the opening at $91.05, with ensuing selling during the balance of this morning’s hours taking it back to below from whence it came. Words from the Iranian military allude to the attack as being a limited one. This face-saving exercise was hailed a success by the chief of the general staff, Gen Mohammad Bagheri, despite 99% of projectiles being intercepted, and crucially for the sentiment of the market went on to say that from Iran’s point of view it was over. The oil price is not about to come crashing down, there is always the worry on how Israel might respond, and this balletic, tit-for-tat ‘proportional retaliation’ might turn out to be a very long rally as seen in the Centre Court of Wimbledon. The word ‘escalation’ will be bandied around for some time yet, and this now overt conflict will continue to play a role going forward, but for the moment this chapter of lunacy appears to be over.

There is another war and more oil-relevant

We have argued here for a little while that exchanges of missiles and drones will have more influence on energy prices in Ukraine/Russia than Israel/Iran. At least until either sanctions on Iran are policed to the full mandate or Iranian oil installations are targeted. But the drone attacks initiated by Ukraine on Russian oil and gas facilities saw retaliation last week on power plants in and around Ukraine, and with its power grid under extreme strain, any sort of outages will hamper its ability to carry on defending itself and embolden Russian aggression. One can only imagine that with the only option Ukraine may have to hurt Russia is continued attacks on Russian refineries and their like will result in product export issues as seen of late.

Interest rates and inflation

While all the furore unfolded in the Middle East, inflation in the United States reared its head again and will likely have continued bearing on all-things commodities. At the start of 2024, market supposition was that it would be the US FED that would initiate the first of a series of interest rate reductions and pricing looked for 160-basis points in total easing. Pricing is now at 50-basis points for the year, and it very much looks as if the ECB will beat its US counterpart with a possible cut in June, leaving the FED unable to cut until at least September.

Inflation will have an increasing bearing to the minds of investors and fund managers. The price of oil products is inflationary, but being long of commodities has always been a hedge against inflation and with weighting of any money manager position much larger in oil than other consumables, it is logical to assume that this might be happening already. Even though oil prices had something of mixed week, finishing in the main among negative numbers, open interest increased. M1 futures for the major contracts finished the week in the following fashion: WTI -$1.25/barrel (-1.44%), Brent -$0.72/barrel (-0.79%), Heating Oil -8.79c/gallon (-3.17%), RBOB +1.43c/gallon (+0.51%) and Gasoil -$31.00/tonne (-3.56%).

Yet the heavy market presence of bulls shows no signs of dissipating. Money managers have increased their bullish ICE Brent crude oil bets by 4,100 net-long positions to 303,935, long-only positions rose 15,448 lots to 385,456 with both being the highest in more than two years and despite the ‘roll period’ that can often see length liquidation. All the while the US Dollar is on a tear making oil prices in local currencies so very much more expensive. How the much-traded inverse relationship is being ignored can be seen in Gold and Copper, which are the usual running mates of stress and inflation along with oil. Higher for longer interest rates will have a derisory influence on loan-heavy names in technology and if migration occurs from equities, one might see more landings into commodities and oil. Markets will look to the start of company result season this week and whether any poor showings along with inflation worry and such flight of money from bourses elsewhere is indeed a reality.

The International Energy Agency is back to its transition ways

The IEA recognises a firmer demand picture for 1Q24, referencing supply security and the success of OPEC+ cuts along with a brighter global economy, but revises the quarter’s demand growth down by 100kbpd to 1.6mbpd. The report relies on the increasing production of the US, Brazil, Guyana and Canada “to smash records” in 2024/2025 and by doing so meeting exactly its forecast global demand growth for this year and next. Indeed, projections for the US in 2024 and 2025 sees the US as once again the largest source of supply adding 650kbpd and 540kbpd respectively. Such growth, it expands, will have a negative impact on the call for OPEC+ call in 2025 giving times of spare capacity reaching 6mbpd for the alliance, and excluding the pandemic, the largest ever buffer. The current claim on the OPEC+ will amount to 41.9mbpd for 2H24, 200kbd higher than March production, assuming current cuts are left in place, but for next year the positive balance turns negative and deceleration in requirement will see it reduce to 41.5mbpd.

It would appear that the divergence that we have to come to expect between the IEA forecasts and those of OPEC are set to rejoin their argument and different paths. Returning to its thinly veiled opinion on how fossil fuels will see a peak by 2030, the banner headline is that global oil demand will once again revert to its downward trend. “Global oil demand growth is currently in the midst of a slowdown and is expected to ease to 1.2mbpd this year and 1.1mbpd in 2025 – bringing a peak in consumption into view this decade”, sets the tone for its Oil Market Report. Arguably its major beef with notions of demand is founded by its view on the diminishing need of oil from China. From 2013-2023 China’s GDP boasted an average GDP of 6% and was comfortably the major source of demand commanding two-thirds of demand. It does agree with OPEC and the IMF with others that China’s GDP will run to 4-5% in 2024/2025, but with the take up of EVs among other negative drivers, China’s call on oil will pull it back to one-third of global demand. Although it expects consumption to be robust in 2024/2025 and stay so for some years to come, the IEA continues to lean on the uptake of oil-substituting technologies, a flattening of global air travel and aircraft increased efficiency to bring a period of “consequential transformation” and why its demand growth expectations are 1mbpd lower in 2024 and 700kbpd lower in 2025 than that of OPEC.

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