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Rabobank’s Global Strategist Michael Every argues that markets are treating the Iran conflict and Hormuz disruption as largely resolved, with Oil futures not fully reflecting physical supply risks. He highlights scenarios ranging from a broad United States (US) win over Iran to prolonged blockades, and notes that energy infrastructure accidents and policy responses in Australia and Europe add to longer-term supply and pricing concerns.
War scenarios and futures market disconnect
“Potentially, we could still see this war end in line with what has been our base case for a while now: a broad –if naturally disputed– US win vs Iran by the second to third week of April, giving it de facto control of a new Middle East (or, less likely, a belated TACO). Yet the downside is longer blockades, with tail risks of any new escalation deepening and/or widening the war. The latter scenario might only be priced into the physical market, not the oil futures markets.”
“Australia needs more energy imports as a fire rages at one of its two oil refineries, the latest in a series of such accidents at the few western facilities still operating. An accident, sabotage, or just the result of over-working the facility in a crisis? Regardless, the founder of Ivanhoe Mines states that: “The Australian mining industry is now on the verge of collapse due to diesel shortages… the fuel supply chain that powers every drill, truck, and haul is about to snap.” Who drove that decline in refineries, one may ask? Markets and their uncanny ability to ‘price things in.’”
“Brussels warned EU countries not to hoard fuel within their borders weeks after telling everyone there was no risk of an energy crisis. Reportedly, the European Commission also wants to see fossil fuels taxed higher than electricity to drive the EU towards renewable energy in the long term – as member states are doing the opposite in the face of this crisis so far; and, from a broader geopolitical perspective, as we see the warning that ‘Fuel scarcity is European armies’ ‘Achilles’ heel’.’ No military, and no mine, currently runs on electricity.”
“Pulling this all together, it’s not just that the market has priced in only one possible geopolitical scenario ahead: it’s not pricing that geopolitics suggests a future when things aren’t priced in as the norm. At which point, what are markets for? Try answering that without answering what GDP is for.”
