By Anna Szymanski
March 20 –
Everything Mike Dolan and the ROI team are excited to read, watch and listen to over the weekend.
From the Editor
Hello Morning Bid readers!
The energy market is the Iran war’s key theatre of battle – and the damage is escalating – yet financial markets are surprisingly well behaved. Expectations for more hawkish monetary policy weighed on Wall Street and European equities on Thursday, and the latter is set for its third weekly decline – but there is no sign of panic.
Israel on Wednesday struck Iran’s South Pars gas field, the world’s largest, triggering fierce retaliation from Tehran with attacks on energy infrastructure throughout the region, including Qatar’s enormous Ras Laffan liquefied natural gas production hub. This caused European gas prices to shoot up as much as 35% in one day.
We are now officially in the doomsday scenario for energy markets. But even though oil prices in the physical market are soaring with the Strait of Hormuz mostly closed, the oil futures market is still not pricing in a lengthy crisis.
While Brent crude reached a session high of $119 a barrel on Thursday, it ended the day around $108, with West Texas Intermediate (WTI) around $96. Investors may have trimmed the “war risk premium” after Britain, France, Germany, Italy, the Netherlands and Japan issued a joint statement on Thursday expressing “readiness to contribute to appropriate efforts to ensure safe passage through the Strait.”
U.S. President Donald Trump also stated that he had told Israeli Prime Minister Benjamin Netanyahu not to attack Iran’s energy infrastructure again.
But the paper market still appears to be overly optimistic about the duration of the energy shock. Given the reality on the ground, it appears more likely that Brent crude will hit $200 a barrel – something Tehran has threatened – than tumble back to pre-war levels as the U.S. president has predicted.
What’s clear is that the part of the energy market currently feeling the most pain is refined products like gasoline and diesel fuel, particularly in Asia. China currently has the largest crude stockpile – an estimated 1.2 billion barrels – and the biggest refining capacity, meaning it could supply more to neighbouring markets. But Beijing has decided to prioritise domestic energy security instead.
Meanwhile, in Europe, electricity prices are climbing fastest in Eastern Europe and Italy, the most gas-dependent economies.
While the U.S. – as the world’s largest oil producer – is somewhat insulated from skyrocketing prices, it is rapidly running out of shock absorbers to cushion the blow – and average gasoline prices are creeping up toward $4 a gallon.
For more on how the U.S., China and Europe stack up energy security-wise, check out this deep dive by Energy Transition Columnist Gavin Maguire.
The energy crisis was obviously a major point of discussion at the flurry of central bank meetings this week – only the second time ever that the Federal Reserve, Bank of England, European Central Bank and Bank of Japan have met in the same week. The implications of the crisis on policy trajectories differ meaningfully among the four.
The Federal Reserve kept rates on hold, as expected, on Wednesday – though that might not be the case for long. Before the meeting, markets learned that the Producer Price Index (PPI) rose 3.4% on an annual basis in February, well above consensus forecasts.
While near-term tightening might not be the base-case scenario for the Fed, the central bank’s communications on Wednesday suggest it’s increasingly possible that Fed Chair nominee Kevin Warsh’s first move, if confirmed, could be overseeing a rate hike.
The only move among banks reporting this week was the well-telegraphed 25-basis-point hike by the Reserve Bank of Australia. But rates futures markets are now pricing in more hawkish trajectories for most major central banks, causing a rout in global bonds on Thursday.
The broad hawkish shift caused the euro, yen, sterling, Swiss franc and Australian dollar to strengthen against the U.S. dollar – though the greenback is still near multi-month highs.
With much of the world transfixed on the Middle East and President Donald Trump’s other foreign adventures this year, many may have missed China’s quiet – but significant – economic renaissance in recent months.
The U.S. president and his Chinese counterpart Xi Jinping were supposed to meet for a summit in Beijing on March 31–April 2, but Trump on Monday confirmed that he had requested a delay of around a month given the ongoing war. When the two leaders do eventually meet, Trump may find that Xi’s position has strengthened considerably since the start of the year.
Finally, President Trump met with Japanese Prime Minister Sanae Takaichi in Washington on Thursday. He pressed Japan and NATO to “step up” on helping to get energy flowing again in the Gulf. With supply disruptions growing, that task is getting more urgent by the minute.
For more data-driven insights on markets and commodities, check out Reuters Open Interest. You can learn:
And as we head into the weekend, check out the ROI team’s recommendations for what you should read, listen to, and watch to stay informed and ready for the week ahead.
I’d love to hear from you, so please reach out to me at .
This weekend, we’re reading…
MIKE DOLAN, ROI Finance & Markets Columnist: This VoxEU column from the Centre for Economic Policy Research challenges the notion that government bonds are safe havens in a crisis. Three centuries of wars and pandemic-scale emergencies show they consistently produce large real losses for bondholders.
RON BOUSSO, ROI Energy Columnist: This excellent analysis from Carlyle Group’s Jeff Currie and James Gutman considers the long-term impact of the Iran war on global energy markets.
ANDY HOME, ROI Metals Columnist: This timely analysis from the Center for Strategic & International Studies examines how power supply constraints could limit the U.S.’s ability to scale up defense production across key industrial inputs including steel, aluminium and titanium.
JAMIE MCGEEVER, ROI Markets Columnist: If you want a counterpoint to the growing narrative that the U.S. war on Iran is a botched mess, Muhanad Seloom, professor of politics and former intelligence adviser, makes the military case that degrading Iran’s ballistic missiles, nuclear infrastructure, air defenses and navy is proving to be a success.
CLYDE RUSSELL, ROI Asia Commodities and Energy Columnist: This article from Kpler cuts through the recent noise with a clear-eyed look at the strategic importance of Kharg Island to Iran.
GAVIN MAGUIRE, ROI Global Energy Transition Columnist: The Centre for Research on Energy and Clean Air’s latest report on China’s power system trends is a must-read for anyone tracking the country’s energy needs. It covers everything from electricity output to EV, battery and steel production.
We’re listening to…
RON BOUSSO, ROI Energy Columnist: The Ezra Klein Show’s recent episode with Ali Vaez, the Iran project director at the International Crisis Group, offers a deep analysis of U.S. and Iranian miscalculations in their relationship over the past 50 years.
And we’re watching…
JAMIE MCGEEVER, ROI Markets Columnist: Two of the world’s leading oil analysts – Amrita Sen at Energy Aspects and Jeff Currie at Carlyle – discuss why this crisis won’t resolve quickly. The Strait of Hormuz isn’t opening, supply isn’t returning to normal, and Trump can’t “TACO” his way out this time. “The damage is done … There’s an absolute denial and misunderstanding of what’s going on.”
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(By Anna Szymanski)
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