WTI crude oil finished modestly higher today despite the ongoing exchange of fire between Iran and the USA. The market is waiting for the next steps in negotiations and whether both sides are able to open the Strait of Hormuz while they negotiate details of any lasting peace.
What I will notice is that long-dated oil prices are rising and converging towards short-dated prices. December WTI was up $1.50 today to $79.85 and I think it’s more indicative of the market’s broader view of oil prices.
It’s obviously risen to $80 from $60 but for the broader market, that seems to be okay. Yes, it’s a 33% gain year-over-year but $80 is a tolerable level, and we’ve been there before plenty of times. The market is saying that consumers can absorb it and history is on that side.
Of course, that all assumes that Trump will get the Strait opened in relatively short order. Earlier this week we saw $84 and the only real difference today is some political jawboning and the ongoing leaks about peace. Those leaks are all coming from the US side with the Iranian said continuing to emphasize core demands that aren’t being met.
I’d guess the market is pricing in a full reopening within two weeks but that continues to roll as time goes forward. If at some point negotiations reach a true deadlock, then we could see a rapid repricing. At the moment, the market sees that as remote, despite the obvious problems with negotiations.
The bottom line is that the market thinks that Trump wont’ resume a true shooting war. We see that across assets and it’s been a wonderful trade for the past six weeks
