The market has stopped believing in premonitions

Observer of the Energy Policy magazine Lyudmila Podobedova.

Oil traders are increasingly playing on premonitions, rumors and expectations, guided by experience, macroeconomic laws and ever-growing flows of information.

The latest outbreak of the military-political conflict between Iran and Israel, which lasted 12 days, revealed an interesting trend. If analysts began to make gloomy forecasts with the beginning of the shelling and predicted an increase in oil prices to $100 and higher. In particular, Goldman Sachs prepared several scenarios in which oil could rise to $110 if Iran closes the Strait of Hormuz or to $90 if the Strait continues to operate, but Iranian oil supplies are reduced by 1.75 million bpd. Then oil traders continued to sell and buy oil from the Persian Gulf without any panic, guided by ship traffic data and an increasing array of public information coming from various sources online.

As a result, oil prices at the time of the conflict rose by no more than $10.

Energy Policy surveyed a number of traders to understand how their trading and level of access to information affects the price of raw materials.

As noted by Doctor of Economics, Professor, Head of the Department of Oil and Gas Trading and Logistics at the Gubkin Russian State University of Oil and Gas Pavel Katyukha, the rather strong growth of prices of $10 per barrel in just 12 days of the conflict was mainly due to the expectations of financial "paper" traders-speculators. But even they bet on the conflict ending soon.

“The bet was not made by chance, but based on fundamental factors, as well as an analysis of open and closed sources of information,” the expert notes.

Physical traders, having included a risk premium in the price, continued trading without expecting the conflict to escalate. “Physical traders on spot hubs include a risk premium of $1-3 per barrel in advance when selling oil lots and take this into account when discounting subsequent transactions. It is important for them to sell the contracted oil lots within a month, and therefore traders react to real short-term obstacles related to exports. In the event of an escalation of the Iran-Israel conflict, Tehran promised to close the Strait of Hormuz. But this turned out to be disadvantageous for Iran itself, the ships continued to move, and traders saw this in real time,” the professor noted.

Traders have been working with vessel tracking data for over five years, which allows them to make more informed decisions. Therefore, fundamental factors were more important for physical traders, primarily the actions of OPEC+ to increase oil production, the rate of inflation and fuel prices, says Roman Kazmin, head of the ICIS Heren LNG department.

"Prices have risen so little because of the actions of OPEC+. The actions of this player in the market are more significant, and the group of eight volunteer countries continues to rapidly increase production, and the entire market knows that in August they will continue to do so at a rate of 411 thousand b/d," he said.

"In addition, we understand the political factor: if oil prices remain high in the medium and long term, fuel prices rise, and this adds to the risk of rising inflation. Thus, US intervention in the conflict for one reason or another was already built into the situation," the trader noted.

"The time has passed when prices grow only on expectations. The real factors of the market are its surplus. Even China, in the event of a decrease in production and exports from Iran, could quickly find an alternative from other suppliers. OPEC+ continues to increase production at an accelerated pace, and the market takes this into account," notes a trader from a Chinese petrochemical company.

At the same time, the data on ship movements showed that “Iran itself, when some people there were talking about preparing to close the Strait of Hormuz to shipping, increased the rate of transportation of its oil through this strait at the height of the escalation of the conflict.”

"So the price follows from all these factors. It could not have grown to $100 per barrel, since it is not only speculators who decide how commodity prices will behave," the trader summed up.