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AP Investment Insights NigelGreen IA
Oil prices are trading as if the Iran war is over and the tankers are already sailing. Neither is true yet, and the gap between the two could prove expensive for the global economy.
Brent crude fell almost 3% on Tuesday to $89.66 a barrel, its lowest level since the end of August, after Donald Trump said the conflict was effectively over and further strikes shouldn't be needed. He also made clear US forces stand ready if fighting resumes. Traders seized on the first message and largely brushed aside the second.
Even if a deal were signed this week and the Strait of Hormuz reopened in full tomorrow, the oil market would still be months away from anything resembling normal supply. Markets have priced in the diplomacy and skipped over the logistics.
Restarting the world's most important energy corridor is a slow, practical job. Tankers have to be repositioned after months of avoiding the Gulf. Insurers will want hard evidence the waters are safe before they cut war-risk premiums, and shipowners won't send vessels back on the strength of a press conference.
Then there are strategic reserves. Governments that ran down their emergency stockpiles during the conflict will be keen to rebuild them. Those purchases are likely to soak up a large share of any extra crude before it ever reaches the open market.
Production itself won't simply switch back on. Oil fields that have been shut for months don't come roaring back. Some output returns quickly, while plenty takes far longer as operators deal with damaged infrastructure and technical problems. Liquefied natural gas plants are slower still.
See also Winners and losers if a blue wave sweeps US Congress We'd be surprised to see Gulf oil and gas flows back at pre-war levels before the middle of next year.
If we're right, oil prices are likely to stay higher than futures markets currently suggest. And energy costs rarely stay contained. They feed into freight, food and manufacturing. When they linger, companies pass them on to customers, and workers respond by pushing for higher pay.
Central banks fear this second wave of inflation more than the initial spike, because it's far harder to reverse once it takes hold.
The Federal Reserve is likely to be slower to cut interest rates than markets expect. Europe and Britain look even more exposed, since both import so much of their energy. The European Central Bank and the Bank of England will probably find it harder still to ease policy if fuel and transport costs refuse to come down.
Asia is set to carry a heavy share of the cost of any delay. It buys the bulk of the crude shipped through Hormuz, and many emerging economies face a double hit, because oil is priced in dollars and their currencies are weaker.
Expectations of rate cuts have crept higher as oil has fallen. Should inflation prove stickier than hoped, we expect those expectations to be scaled back. Mortgage rates, business loans and government borrowing costs could then stay higher for longer than many households, companies and finance ministries are planning for.
There's another reason for caution. Most of the war premium has already drained out of the oil price. Markets have left themselves almost no cushion. If the talks stall, or a tanker is struck, prices could jump sharply with nothing to absorb the shock.
See also Government debt is now the biggest threat to your wealth The risks, in other words, now lean heavily in one direction.
None of this takes away from the significance of the progress being made. A lasting peace deal would be an enormous win for the global economy, for energy security and for the millions of people affected by the conflict.
But ending a war on paper and restoring the flow of energy are two very different timelines. The handshake can happen in an afternoon. Getting oil and gas moving freely again takes months.
Oil markets have rushed to the finish line. The real economy will take the slower route, and inflation and interest rates around the world are likely to feel the effects well into next year.
Nigel Green is deVere CEO and Founder
Also published on Medium.
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