Investors are running out of time to brace for true oil shock from conflict

SINGAPORE/LONDON — In thrall to an artificial intelligence (AI) boom that has sent stocks to record highs and harboring hopes of a short-lived Iran war, investors have yet to prepare for a doubling of physical oil prices. The window to do so may soon be closing.

There are plenty of reasons for market confidence, largely centered on the AI galaxy of hyperscalers, semiconductor makers and software developers and robust earnings growth. The S&P 500 hit fresh record highs on Thursday.

While price pressures are showing up in business activity surveys and consumer inflation expectations, growth and employment remain on a fairly even keel and global central banks suggest they will not rush to raise interest rates as they weigh the impact of the war.

The part of the energy landscape where the real issue lurks is the physical market, where actual barrels of crude and refined products change hands, rather than electronic futures.

At around $130 per barrel, prices here are some 70% higher than where they were in February, whether that is North Sea Forties, Angolan Cabinda or Norwegian Troll.

This reflects much higher energy costs for the world economy than implied by Brent crude futures, which are trading around $110 a barrel, 50% higher than at the end of February.

Brent for delivery in 12 months’ time is above $80 a barrel, 20% above late-February levels.

“The physical markets reflect the reality on the ground and the futures market reflects more perceptions and hopes,” said Tamas Varga, an analyst at energy broker PVM Oil Associates.

“One might say that physical markets are the true reflection of actually what’s happening around the Strait of Hormuz.”

A BILLION BARRELS GONE
The war has effectively shuttered the Strait of Hormuz, through which 20% of global energy supplies flow. Vitol, the world’s largest oil trader, estimates 1 billion barrels in supply could be lost by the time the market recovers.

Fatih Birol, the head of the International Energy Agency, said in April that oil prices did not reflect the current situation and the world should prepare for much higher prices.

According to RBC Wealth Management head of investment strategy Frederique Carrier, a rule of thumb used by the firm’s chief economist is that an oil shock needs to last between three and six months to have a sustainable impact on inflation.

“And we’re not quite there in that window — we (will be) soon,” she said, adding that her firm was neutral on equities, but favored commodity-linked plays, such as shipping and warehousing.

Oil traders are stress‑testing their books against a scenario in which crude prices hit $200 to $300, global commodity trading house Gunvor Group executive Jeff Webster told the FT Global Commodities Summit earlier in April.

“The idea that it’s definitely going to be stagflation, or it’s going to be fine. That’s the bit that we’re finding a little bit surprising,” said Andrew Chorlton, CIO for public fixed income at M&G, referring to a toxic mix of high inflation and weak economic growth.

“That seems a little complacent.”

He said he had become “more tactical” on fixed income, looking at the divergence between countries or government bond yield curves.

Consumer inflation expectations are picking up. So are market-based indicators, such as inflation swaps, which show investors see US inflation around 3.53% in one year and around 2.75% in five years, above the Federal Reserve’s 2% target.

These measures were closer to 2.4% in February, before the war erupted, LSEG data shows. It’s a similar picture in the euro zone and UK.

Nuveen global investment strategist Laura Cooper said her firm still had AI tech exposure given its profitability, but was countering that with “dividend growers,” infrastructure and real assets such as real estate and gold miners as a hedge against risks.

LONG-TERM TRENDS AT RISK?
No matter how big the disruption, markets eventually reprice associated risks, supply chains adapt, volatility subsides and investors return their focus to the big, long-term trends.

“You won’t know it’s a tipping point till the market reacts to it,” said Paras Gupta, who manages discretionary portfolios for ultra-high-net-worth individuals in Asia for UBP in Singapore.

“We just have to wait and see and be nimble. Everybody has one finger on the trigger.”

The major risk with the Iran crisis lies in shifts in those precise long-term themes, analysts say.

In under 18 months, the Trump administration has shaken up global trade and international relations, generating near-unprecedented levels of uncertainty about America’s reliability as an economic and security partner.

“This is about much more than when the war will be over, but rather about how the “Rupture” is playing out — shifting policy as well as public attitudes,” said Tina Fordham, founder of political strategy consultancy Fordham Global.

“By the time geopolitical risks make landfall and hit financial markets, it is typically too late to mitigate them.” — Reuters