- Opinion
- Oil & Gas
Geopolitics and psycho-
logy rule oil markets
There are many lessons to be learnt from trading crude in the past decade
Mohamed Nureldin Abdallah/ReutersIt is impossible to trade crude oil by analysing supply and demand dynamics in the physical or wet barrel markets alone.
While 100 million barrels may cross borders daily via tankers and pipelines, the marginal price of black gold is determined by leveraged speculators trading 1.5 to 2 billion barrels per day through oil futures, options, swaps and over-the-counter (OTC) derivative contracts.
Understanding positioning, psychology and money flow in real time is essential to making money in Brent and WTI crude trading.
Prices are determined by the successful reading of risk sentiment – not by supply decisions made in the boardrooms of Chevron and Shell, or by spare capacity and Opec+ quota politics dictated from the Kremlin or the royal palaces of the Gulf.
I have often thought that Sigmund Freud’s insights on death wishes and herd instinct are far more relevant than International Energy Agency pronouncements.
We have seen this play out dramatically this month. Look up the price chart of XLE (the energy exchange-traded fund). A violent breakout occurred around 45, it kept rising and is now at 55. So energy shares have gained 22 percent in a month when Nasdaq software stocks have fallen. However, the rotation and momentum are sudden and why only professionals should trade energy futures and options.
I learnt this lesson the hard way, having traded WTI and Brent futures and options since 2016.
A decade ago, I thought the emergence of the US as an energy superpower during Barack Obama’s second term would reduce crude-price volatility and the role of whimsical government decisions on the price of West Texas or Brent would decline.
After all, more than 3,000 American oil companies with zero government ownership explored, drilled, refined, transported and marketed shale oil and gas – not vast state-owned energy conglomerates like Saudi Aramco, Kuwait Petroleum, Adnoc, Rosneft, Pemex and NIOC (once the Anglo-Persian Oil Company).
Investors concluded that if Saudi Arabia was no longer the de facto central bank of oil then all Middle East assets faced a Darwinian shakeout
This facile assumption was proven wrong at the November 2014 Opec conclave in Vienna. Ali Al-Naimi, then the Saudi oil minister, triggered an oil price crash in a bid to drive his Texan shale rivals out of business.
Al-Naimi signalled to the assembled media that the kingdom would not defend any given price level for crude – in essence, abandoning Saudi Arabia’s role as Opec’s swing producer and quota enforcer.
Every macro hedge fund in the world recognised this as a licence to print money by shorting Brent. The price duly plunged from $115 a barrel in 2014 to as low as $28 in early 2016.
This was a catastrophic moment for GCC economies. Oil revenues declined at the moment Isis seized the Iraqi city of Mosul and the Syrian oil provinces of Deir ez-Zor and Hasakah in the heart of the Arab world.
Saudi Arabia alone lost $500 billion in petrodollar revenues in the price crash, and Dubai property entered a six-year bear market, with home prices losing 50-60 percent.
Investors had concluded that if the kingdom was no longer the de facto central bank of oil then all Middle Eastern assets faced a Darwinian shakeout, so risk premia skyrocketed.
Even though the US had replaced Saudi Arabia and Russia as the world’s leading oil producer, thanks to the shale revolution, any oil trader who ignored the geopolitics of the Middle East and Russia did so at their peril.
So it is that a single human being can change the course of prices. In February 2022, Vladimir Putin created a panic that saw Brent soar to $130 a barrel after invading Ukraine. Mohammed bin Salman was the architect of two oil price crashes in 2019 and 2020, in an effort to persuade Russia to cut output.
And now Donald Trump has achieved the same when he sent CIA paramilitaries to spirit Nicolás Maduro out of Venezuela and ordered the USS Abraham Lincoln carrier strike force to move from the South China Sea to the maritime boundary of Iran.
The egos and realpolitik of an American president, a Russian dictator and a Saudi crown prince have proved more important than any econometric model or Wall Street bank forecast.
Brent at $68 is pricing in an imminent American attack on targets in Ayatollah Ali Khamenei’s Iran. While diplomacy still has a slim chance of success, I doubt that the supreme leader will heed US demands to give up his nuclear programme, ballistic missile arsenal and proxy militias in Iraq, Lebanon and Yemen.
A full-scale war that disrupts tanker traffic in the Gulf or blockades the Strait of Hormuz or subjects the oilfields of the GCC to retaliatory drone and missile attacks by Iran’s Revolutionary Guards is a nightmare scenario for the oil market.
Is this the subliminal message behind the 30 percent rise in gold and the surreal 65 percent increase in silver in January? Which asset is truly a safe haven in a world gone mad?
Matein Khalid is an investor in global financial markets and board adviser to leading family offices in the UAE and Saudi Arabia
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