Alex Krainer
In
yesterday’s report we discussed the way another escalation of war in
the Middle East might impact global oil markets. In the worst case
scenario, the entire region’s energy infrastructure could be impaired,
reducing global oil supply by as much as 32%. Unfortunately, the
standoff between the U.S. and Iran is not the only factor that is now
causing large scale disruption to the world energy production.
Over
the recent months we’ve witnessed a series of targeted attacks on
energy infrastructure in other parts of the world, coupled with multiple
industrial accidents that have become so frequent, it’s become
difficult to keep track of them. In just the last five days, there have
been six unrelated incidents:
- 15 Apr: Viva Energy Geelong Refinery fire (Australia)
- 16 Apr: deadly gas pipeline explosion in Haripur, Pakistan (8 killed)
- 18 Apr: Ukrainian drone attack on a Rosneft oil refinery and Tuapse oil depot and export facility in Krasnodar, Russia - probably the largest such attack to date.
- 20
Apr: Massive blaze at one of India’s biggest petrochemical refineries
(HPCL Rajasthan) — a day before PM Modi was meant to inaugurate the
facility
- 20 Apr: Explosion + fire at CET Vest power plant, Bucharest (Romania)
This
morning we also learned about a “massive” explosion of an oil rig
registered near Etoile, Texas (U.S. Department of Homeland Security
already attributed the attack to Iranian sleeper cells).
Of course, most of these incidents could be coincidences, but they’re
only a small set of what’s been happening for months now. The following
list will prove a greater challenge for coincidence theorists:
In
addition, we have seen multiple attacks on the Russian tanker “shadow
fleet,” and pipelines, including the destruction of the Nord Stream
pipelines in 2022.
Oil price and the inertia of markets
In
view of all this, the price of crude oil - at least so far as the Brent
and WTI benchmarks are concerned - may still be too low to reflect
these realities. Brent crude has peaked at $120/barrel in March, but
over the ensuing weeks it dropped back below $100/bbl (it is currently
trading near $96/bbl). At the same time, WTI, which also soared to $120
now dropped below $90/bbl. There has been a lot of speculation that this
is principally due to market manipulation, which is certainly
plausible, but part of the explanation is also in the very nature of
markets and the process of price discovery.
As I pointed out in
the past, large-scale price events (LSPEs) almost invariably unfold as
trends, spanning months or years. In the recent past, we saw the price
of gold languishing for nearly three years in a horizontal range between
$1,800 and $2,000 per troy ounce. Then, at the beginning of 2024 the
price broke higher and continued to rise over the following two years
towards its new all-time high at over $5,500/tr.oz.
That
LSPE involved a price discovery process that spanned nearly two years,
and I expect that we might see a similar process unfold in energy
markets over the coming months. Market analyst Lukas Ekwueme (@ekwufinance) summed up the market reaction to the 1973 OPEC embargo, which also manifested a certain inertia and a LSPE that spanned six years:
“…
oil moved first: from ~$4 to ~$10 during the 5-month embargo. But the
real move came after. Over the next 6 years, oil kept rising, eventually
peaking at ~$40, another ~4x higher even after the embargo had ended.
The embargo didn’t just cause a temporary spike.... it reset the entire
pricing regime. The pre-embargo price never came back… oil entered a new
reality.”
Equity prices also readjusted over a
longer time interval: two weeks after the embargo was declared in
October 1973, the S&P dropped about 24%. Then came a period of
consolidation lasting some5 months before staging another another leg
down of about 33%.
The
episode is yet another corroboration of our core thesis that markets
move in trends. We may not be able to predict their trajectory with any
degree of accuracy, but by adhering to a set of systematic
trend-following strategies with discipline and patience, we should
always be able to generate substantial windfalls from such LSPEs in
almost any market, regardless of whether the prices are rising or
falling. The rewards never come overnight but accrue over long stretches
of time, which is why discipline and patience are as important as
having an effective strategy.