LIVE MARKETS-Are markets misreading oil's slippery risks?

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ARE MARKETS MISREADING OIL'S SLIPPERY RISKS?

Since the US and Israel declared war on Iran on February 28, thereby compounding supply concerns arising from the Russia-Ukraine war, market moves have largely been dictated by crude. Dropping crude eases inflation worries, but when they're on the rise, those fears, and the rising likelihood of Fed policy tightening, can spark a selloff. Oil and equities are on a seesaw.

And despite repeated claims peace negotiations are progressing, events in the Middle East have shown little evidence to that effect.

Nigel Green, CEO of the deVere Group, believes that, despite Monday's rise, "the oil market is pricing in a peace that hasn’t arrived."

Green notes how crude prices dropped following President Trump's announcement on social media that Russia and Ukraine had agreed to stop striking each other's energy infrastructure.

Noting that "markets love an announcement," Green goes on to point out that nothing has changed.

What's more, Washington seems to be in the habit of declaring fleeting ceasefires. In September, a similar deal was announced, which "barely lasted a week," Green says. And now markets are being asked to believe that this time, it's for real.

"Anyone who trusted the dip back then paid for it," Green adds. "Pricing in calm before it’s verified is a bet on hope, and hope has been an expensive commodity in energy markets this year."

At the same time, hurricane season is upon us, with Isaias forcing producers to shut down about 63% of Gulf of Mexico oil output. And Iran-backed Houthis continue strikes on Saudi Arabia, which holds the world's largest spare oil capacity.

"Any one of those things would justify a risk premium," Green says.

"All three at once, heading into winter, suggests the floor under oil sits well above current trading."

Meanwhile, a separate note from Goldman Sachs says that while adaptation to Middle East supply "will eventually reduce oil prices," the possibility of escalating tensions "still poses significant upside risks."

(Stephen Culp)

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