Oily tails…

Like forecasting the timing of recessions, it is a truism that predicting the price of oil over anything beyond the short term is usually delusional, because of all the economic and geopolitical factors which have an impact.

How far will US tight oil production surge? Will OPEC decide to curb production with a view to maintaining prices at levels that support members’ already strained budgets? What will be the outcome of the US/PRC “trade war”? How accurate are forecasts of the demand side of the equation?

Amongst all this, there is that perennial favourite, Middle Eastern geopolitics. Venezuela’s production travails are seemingly yesterday’s news!

It can make one’s head spin to try to assess the various scenarios for mayhem that could unfold- especially in a “post-Abqaiq” world in which a few missiles and drones can take out more than 5% of global supply in an instant. In that case, while there was a temporary movement up in price, there was no sustained uptick, which perhaps begs the question of how bad things would have to be before there was a material sustained change in expectations and so prices.

While the world remains beset by far too many bilateral tensions (India/Pakistan being a good example of nuclear war as a tail risk), it is the Middle East which is the source of most state and state-supported conflicts; many of which, because of their seemingly interminable and intractable nature, lead to a jaded and potentially dangerous “so what?” response. What is interesting is that actions which would once have been considered a casus belli are now seemingly regarded as “background noise”. Israel attacks Iranian positions in Syria; or Turkey invades northern Syria, while Saudi Arabia is “certain” that Iran was behind the attack on its Abqaiq facility.

So one has to wonder what it would take for a real “shooting war” to break out that would actually get the oil market’s attention. After all, the conflict in Yemen seems only to elicit ennui.

Iran and Iraq are both much less stable than they may appear (which is saying something!) The governing elites in each, if they felt sufficiently threatened, could easily decide that a “patriotic” war (ruinous as it might be) was “necessary” to maintain power and disguise that increasing fragility. After all, there is a precedent from the war of 1980-88. Of course, this is just one scenario. Israel or Iran could each be seen by the other to have “gone too far” with a particular action, with either side goaded into a war of choice, simply because a failure to respond could be seen as an existential weakness.

These are the topics which “think tanks” and “pundits” enjoy speculating about- but without “skin in the game” it is mere idle chatter.

At Awbury, such things matter. The price of oil has both a macro and an idiosyncratic impact on portfolio risks, so, while we would not claim that we somehow have a special “edge” in forecasting, we most certainly do avoid “wishful thinking” and constantly update our knowledge and understanding of the key factors which do or could have an impact on the supply and price of oil. Regarding it as “background noise” would be foolish.

The Awbury Team


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