Key Takeaways
- Oil prices have fluctuated around news flow and the ability of shipping to navigate the Strait of Hormuz.
- Prices fell ahead of the weekend after Iran declared the Strait open, before rising once more after shipping was again blocked.
- Equities continue to price in relatively benign outcomes with positive earnings updates (and future guidance) driving upside.
- This situation in commodity markets is more complex as real supply constraints loom into view.
- With shipping movements curtailed, energy supply issues are becoming more acute. Concerns are growing over jet fuel supplies in Europe on a four-to-six-week view.
- Volatility will likely remain a feature ahead of ceasefire negotiations.
Last week saw increasingly positive news around events in the Middle East, particularly on Friday when the oil price dropped significantly after Iran announced that the Strait of Hormuz was to be open to all shipping during ceasefire talks.
However, developments over the weekend have confused matters. Friday’s 10% oil price drop had reversed into a 5% increase on Monday morning – a move triggered by the continued closure of the Strait.
Despite the short ‘open’ window, we saw very few ships passing through. Some vessels tested navigation channels during the weekend, but many turned back after some ships were fired upon. We also witnessed the US seizing an Iranian vessel in the Gulf of Oman. Last week’s progress seems to have reversed.
The current ceasefire is due to end on Wednesday, but ahead of that there are expectations of more peace talks. The US is sending a delegation to Pakistan but there is uncertainty around Iran’s delegation. Recent rhetoric has been more escalatory with the US once again threatening Iran’s infrastructure and the Iranian regime pushing back on comments around concessions on nuclear capabilities.
What does this all mean for financial markets? Equities have enjoyed a strong rally in recent weeks with pricing levels reflecting relatively benign outcomes. Upward moves have been driven by corporate earnings season, which is proving very strong thus far. Companies giving guidance are not particularly fazed by the conflict and this is helping look beyond near-term headlines.
The situation around commodity prices is much more complicated. Dated Brent (oil for immediate delivery) really started to show supply stress last week. Prices were at or above $140 per barrel early last week and finished just below $100. We are moving from price issues to actual challenges around supply. The reason for that is simple. Ships having left the Gulf ahead of the conflict will now be making final deliveries to refineries around the world. When those inventories are not replenished, as ships remain unable to navigate the Strait, supply issues will become more acute. Indeed, we are already seeing warnings around jet fuel in Europe, and those issues will likely become more pertinent in four to six weeks’ time.
In summary, commodity prices continue to reflect uncertainty whereas equity markets are anchored around more benign outcomes. With a ceasefire deadline looming this week and a lack of clarity around upcoming negotiations, we will likely see some elevated volatility. We will continue to monitor events closely, especially around risks to energy supplies. Earnings, meanwhile, look set to be the key driver of equity markets.
