Wall Street over a barrel

A week which began with oil market prices looking strong and likely to get stronger faded rapidly by Friday evening leaving everyone scratching their heads as to what to do next. Amongst the price drivers during this week, two items stood out, talk of a peace deal in Gaza and some surprising statistics telling a story the American economy being in better shape than reports have previously suggested! Let’s go with the latter story to begin with as this was what initially aggravated the oil market’s bullish stance during the latter part of the week.

January’s U.S job figures showed Americans are finding work much more easily than gloomy U.S. economic forecasts have been telling us for the last two years. According to the Bureau of Labour Statistics data released on Friday, the U.S. added 353,000 jobs in January 2024. That was a much higher hiring rate for non-farm jobs than the 176,500 positions economists surveyed by a FactSet forecast, and even more than the 185,000 called for by the Bloomberg consensus. This was very good news for American workers as well as President Joe Biden, his message on the nation’s economy booming not declining is finally getting through and showing in the numbers countering previous economic Wall Street forecasts. The key message from this data appears to affirm (yet again) the “wrongheadedness” (Bloomberg’s word not mine, but kinda cool) of almost two years of recession predictions that are struggling to be “on the money”.

Wall Street economists and bankers look to have been reading the wrong script on the state of the American economy for almost two years now if we believe their critics. That whole idea of “wrongheadedness” isn’t unfamiliar to oil markets either.

Wall Street whizz kids, economists, futures chartists, hedge funds, banks and general wizards have also made wrong calls for oil prices in the same time frame calling the future price of crude oil to become anything between $90 and $150 a barrel when the reality has been anything but. (We should note ICE Brent closed on Friday evening at $77.33 and WTI at $72.28 both crudes trading at their lowest prices since November 2023 in futures markets).

The whole practice of following Wall Street thinking has become a very expensive and precarious business for those prepared to invest millions of dollars in oil price and economic forecasts many of which are driven by algorithmic projections. In simple human terms it’s fair to say oil prices are faltering because there is too much oil. To have a better chance of success, we need to understand better the balance between physical oil supply and physical oil demand and whilst there are some who would argue all you need to know about the physical oil markets is in the Wall Street charts time and again since the pandemic, this theory has been proven to be wrong.

The fact remains that major oil trading houses made billions of dollars last year from trading physical oil. Wall Street hedge funders and banks didn’t. And as we pondered on Friday evening where the markets may go from here …… along came Friday and Saturday night!

On Friday night U.S. jets fired missiles into more than 80 rebel military targets in Iraq and Syria. The targets being “Iran’s Islamic Revolutionary Guard Corps and affiliated militia groups “according to a Pentagon press release.

Iran denied supporting such rebel groups. This American mission was in retaliation for the loss of 3 American soldiers in Jordan a week ago. On Saturday night, U.S and British forces supported by six other countries including Bahrain, carried out strikes against 36 military Houthi sites in Yemen, specifically those associated with the group's deeply buried weapons storage facilities, missile systems, launchers, air defence systems and radars, the Pentagon said in a statement.

"These precision strikes are intended to disrupt and degrade the capabilities that the Houthis use to threaten global trade, and the lives of innocent mariners," according to the Pentagon statement, which warned that "we will not hesitate to continue to defend lives and the free flow of commerce in one of the world's most critical waterways. “Houthi leaders responded saying the group wouldn't be deterred by the new round of strikes - nor by ones to come.

President Biden said :

“If you harm an American, we will respond, “In just two days, America had turned its attention and might to ridding the Middle East of terrorist’s intent on damaging commercial shipping flows through the Suez Canal, the Red Sea, the Horn of Africa, and the Gulf of Aden! As we try to draw breath after this weekend’s events, we try to assess the next move for oil prices and to do this we need to revisit some of the current oil market drivers other than algorithms.

Let’s look at some basic key points…..

The war between Russia and Ukraine rages on (lest we forget).

It would appear the EU are ready to finance Ukraine with a fresh injection of funds to the tune of $50 billion euros to support the Ukrainian efforts to see off the Red Bear, the EU finally having finally roped an agreement with their runaway bad boy Victor Orban the President of Hungary.

Russia claims they have cut crude exports to the World in compliance with OPEC’s policies and quota allocations, but those figures seem to bounce around like a rubber ball on a wooden floor. We can assume somebody somewhere is still analysing all this but it’s beyond accurate calculation for most. President Putin faces an election in March, he will win, but he’s ensuring his audience can hear his repeated comments that Russia is ready for peace talks…..just in case.

The Red Sea and the Gulf of Aden remain under threat of missile and drone attacks by Houthi rebels intended to disrupt global shipping, both have become no go areas for many shipowners carrying the World’s goods and cargoes of oil (although both Russia and Saudi Arabia say they continue to use these waterways without problems claiming the risks are manageable).

Fighting in Gaza continued Friday, after the ceasefire mediator Qatar said on Thursday that Hamas had given its “initial” support to a potential deal for an exchange of hostages and prisoners during a pause in hostilities.

The good old fashioned Federal Reserve bank in America indicated they will be keeping interest rates unchanged and hinting that monetary easing is still some time off, as well as concerns about a faltering in China’s economic growth, both weighed on oil prices this week. It is reasonable to suggest any one of these events never mind all of them should be driving oil prices higher, but for almost the last two years that’s not been the case, so in many ways it’s easy to understand why economists, banks and hedge funds have struggled to accurately forecast future oil prices.

However, what we have in all areas is a total tit for tat stalemate. Today, algorithmic forecasting and trading is playing second fiddle to real oil demand from real consumers and all the time those consumers have abundant supply and can choose their quality of product they can name their own prices. Until that situation changes the influence of Wall Street forecasters, funds and banks will play second fiddle to the consumer. Whilst physical oil traders fly high with record profits Wall Street remains over a barrel looking down.

One other thought, certain comments made these last few days suggests many of those involved in the current Middle East unrest are wondering what exactly is being gained from this tit for tat stalemate position. There’s a sense that many countries caught up in the Middle East crisis don’t want to be, rebel alliances claiming to represent those countries are fighting for their own destructive causes not for the government of the day (in the main!).America has said they do not want a war with Iran. Iran has said they do not want a war with America, Russia seems content with a stalemate war in Ukraine, China doesn’t want a war with anybody, except maybe a local one.

So could it be the nuclear deterrent is working but nobody has realised this yet!!

Why don’t we just stop all wars?, you never know it could just suit everybody!!

This week’s closing guide prices:

ICE Brent 77.33 (-6.58)

WTI 72.28 (-6.05)

ICE gas oil 813.50 (-60.75)

Euro Mogas swaps 755.00 (-54.00)

Euro Naphtha swaps 616.00 (-72.00)

Nymex gasoline 2.1475 (-10.72 cents a gallon)

LPG swaps 511.50 (-2.50)

Opec basket 80.46