Shambolic, slippery, slick street

Day before, global crude prices plummeted by more than $14 a barrel, or the largest fall since 2020. In the spot markets, the prices were up yesterday. The Indian Sensex, the Bombay Stock Exchange index, rejoiced the day before, as it catapulted by nearly 3,000 points. Yesterday, it was down by nearly 1,000 points. Rest assured, despite the so-called two-week ceasefire between Iran and the US, which some have dubbed as ‘two-weak,’ or ‘messy,’ things may get more difficult in the future. This is because the ceasefire is temporary, various participants are happily breaking it, and the different sides have their own variations of an agreement that has not been disclosed.

Confusion and chaos remain, and this is reflected in what the brokerage houses think of the crude oil prices by the end of this year, and in the next one. The range for 2026, obviously once the war ends, if it does end that is, hovers between a high $92 a barrel, or just under yesterday’s prices, and $70. The spectrum for 2027, with hopes that there is no way that the war will continue till then, is between $64 and $80. In both cases, the range is high, $22, and $14, respectively.

There is considerable lag between quoted prices (contract), spot prices (immediate purchases), and futures. According to reports, even as the quoted ones were just over $100, and came down to the mid $90s, the spot prices reached as high as $140, with some grades trading at $150, or at 10 per cent premium. The latter implies that there is an acute scarcity. The futures market, as is logical, is more sober because traders know that the war will end inevitably. The only problem is when and how. With statements changing within hours, if not minutes, oil prices are caught between facts, fiction, wishes, and desires. First, let us consider the nature of war and ceasefire. Hours after it was declared, Israel attacked Lebanon, and Iran retaliated. Israel stated that Lebanon was not included in the terms, which was accepted by an US official a few hours later.

Iran claimed that the US had agreed to its 10 points, but violated three of them immediately after the ceasefire. The US claimed to have its 15-point agenda, and future talks would revolve around them, rather than Iran’s 10 points. Hence, the terms and nature of ceasefire depend on which side one talks to.

Now, let us turn to possible scenarios if the temporary ceasefire somehow continues, and further peace talks are held in earnest over the weekend, as proposed, in Pakistan. The crude’s futures market suggests that “traders still expected the disruption (in supplies) to be temporary, with the possibility of a relatively rapid price correction.” This is based on the understanding that while refineries in Saudi Arabia, Kuwait, and Bahrain were damaged, as was the gas

infrastructure in Qatar, “much of the core oil production capacity… remains intact.” In theory, therefore, oil can flow from the Middle East within days or weeks.

However, some critics maintain that oil and gas flows will be normal over months, possibly years. Qatar has categorically stated that its infrastructure may take years to repair and rebuild. In addition, many nations, which have depleted their emergency strategic reserves, will buy excess and extra oil. In most cases, the reserve levels will be hiked to prepare for a similar situation in the future. Hence, the demand for crude will be excessively high, at least in the short post-war period. Thus, as supply struggles to gather steam, demand will zoom.

One needs to remember that the Iran war has shown the influence a nation has if it controls the oil supply routes such as the Red Sea, and Strait of Hormuz. This may lead to a deeper shift in the global security networks, logistics, and design. More nations will want to use the same strategy as Iran did. More nations will wish to escape being sucked into the waters at the choke points. The energy transport architecture that has “underpinned energy markets for decades” will undergo massive changes. Supply concerns will shift to security ones.

Until now, the US, along with NATO and the Middle East allies, was seen as the dominant guarantor of the security across the crucial shipping lines. Iran has proved that this is no longer the case. Even regional rebels will have the nerves to disrupt supplies. This may introduce a more persistent and permanent risk premium in oil prices. Despite the end of the war, consumers may continue to pay high prices, maybe in the $75-85 range, if not the mid-to-high $90. Thus, more supply may not necessarily translate into extremely-low prices.

Of course, the ceasefire does not imply the end of the war. Indeed, most experts feel that the subsequent negotiations will be more-tricky and complex. It is easier to accept a temporary truce. It is difficult to make it permanent, when the two sides seem rigid and inflexible. “For Iran, the conflict has been existential. For Israel, weakening Iran may be a long-term objective. And US policy goals remain less clearly defined,” explains a media report. Add to this the more-blurry aims of the nations in the Middle East, Iran’s allies, and powers like Russia and China.

This explains why the temporary truce may enable the stuck oil tankers to leave the Strait of Hormuz, if this happens under Iran’s control, one is not sure if the ships will be willing to come back. If the nations, shippers, and insurers remain uncertain about the state of the minds of the negotiators, and, hence, the state of war, the former may not dare to do so. Only the brave and desperate, more the latter, will take the risks. Such doubts and apprehensions will play on the minds of the traders, and the volatility in crude prices will sustain for a longer time.

“A renewal of the conflict represents the worst-case scenario. Sustained high prices would bring back the spectre of inflation, high interest rates, economic slowdown, and growing unemployment. In a global economy already burdened with debt from the Covid crisis, there are few levers left for central banks to tackle this predicament,” explains a media report.

In such a situation, sentiments and emotions will rule, as positive news will lead to excitement, and negative one to moroseness. The frequent fluctuations between boom and doom, glee and flee, and cries and rise will only intensify as the days go on.