Extreme volatility in crude futures prices has eased in recent days, although the market reacted with an 8% jump early Monday to the news of failed U.S.-Iran talks and the beginning of a U.S. blockade of the Strait of Hormuz.
Traders continue to react to any signal of how the worst-ever disruption energy market would unfold, but with uncertainty still very high, oil market participants bet on and try to predict movements. The worst of the volatility may have passed, as investors and speculators appear to have exhausted their capacity to respond to the constantly shifting narratives of the Trump Administration, analysts say. It appears that the oil market is gradually becoming used to the price swings in either direction that follow each post of U.S. President Donald Trump regarding Iran, the state of negotiations, or the navigability status of the Strait of Hormuz, the key oil chokepoint which handled about 20% of daily global oil and gas flows before the war. Moreover, the U.S. blockade raises the value of keeping the Iran-aligned Houthis in Yemen out of the war, Meyersson said. “Both the US and Iranian sides have once again signalled the extent of their respective entrenched positions,” Meyersson noted. “As such, given the time constraints and likely ongoing military preparations on both sides, absent a diplomatic breakthrough, the road to continued warfare remains open.” Oil futures traders are betting on how they believe the conflict would unfold, hoping for the best but wary of the worst. Still, they are a bit better prepared to handle all the conflicting signals they are being given by the hour.
Not prepared are the physical crude markets, where prices have soared to near all-time highs or record-highs, including compared to the 2008 price rally just before the financial crisis.
The sharp decline in crude futures last week was likely primarily driven by an overcrowded long position, rather than any meaningful easing in underlying fundamentals, which continue to point to a tightening physical market, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Monday. Crude futures were trading slightly lower than $100 per barrel as of Tuesday morning. But the price of physical crude for immediate delivery has soared amid the supply constraints and is about $40 per barrel more expensive than the futures. Brent futures may have sunk below $100 per barrel, but constraints are intensifying amid the supply shock, with the physical price of a key North Sea blend, Forties, surging last week to a record high of as much as $147 per barrel. The surge in physical crude prices reflects the massive supply shock, with about 10 million barrels per day (bpd) of crude trapped in the Strait of Hormuz and unable to go to refiners.