Forget trade war, a 20% move implies real war

By: Izabella Kaminska

This was the early-market response to news that Saudi oil facilities had been struck by a suspected Iranian/Yemeni rebel drone strike:

As the FT noted:

Oil prices rose as much as 20 per cent to above $71.00 a barrel — the biggest percentage spike in almost three decades — as markets reopened after an attack on Saudi Arabia’s oil infrastructure at the weekend cut more than half the country’s production.

That’s one of the biggest moves in Brent prices in dollar terms in a single session in a very long time, if not ever.* And for the commodity markets that’s a big deal. Huge, in fact.
Traders on the winning side of the bet will be laughing all the way to the bank right now. But there’s going to have been some serious fallout on the other side. We don’t know the extent to which natural producer hedgers and systematic funds will have been hit, but it’s likely that in the days and weeks to come some extraordinary details will emerge about the bloodbath that took place on the back of that single move.

The key point to remember about the commodity-oriented fund world is this: ever since Trump took over and started threatening Chinese trade wars, the “smart” money has become overly focused if not obsessed by the narrative that global demand will be hit by tariffs and a slowdown in trade. This has led to massively bearish sentiment in the oil futures market over the past year.

And yet, those obsessing about the impact of “trade wars” may have simply missed the wood for the trees. Specifically, that trade wars are irrelevant if there’s a chance the world will go to war.

That may sound hyperbolic but we think it’s essential that someone bluntly states matters for what they are.

And herein lies the contrast between real-world markets and virtual gambling markets. In bitcoinland a 20 per cent move means nothing at all. In commodity markets, it’s a potential signifier that we’ve reached the point of no return in terms of conflict acceleration.

What analysts should be noting now is not the scale of economic loss from Brexit or continued Chinese trade wars, but the degree to which wartime conditions have never favoured free-market norms. To the contrary, in such circumstances, economies turn repressive, protectionist and domestic-production oriented. They also become energy security obsessed.

The UK might be a basket case in many Brexit-related ways but the one thing it’s genuinely got over much of Europe is energy security (at least for as long as it’s got the Scots). And while US/China trade wars are likely to hurt the relevant economies more than help them, the fundamental Trump card held by the US remains... you’ve guessed it... energy security.

*We’re checking if it’s a record, but our data only goes back so far, and one always has to account for the first Gulf war which took place during a time when oil prices were a little less free than they are today, so comparatives are difficult.

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