Oil Hedges Seeing a Huge Spike on Israel-Iran: Expert

Bloomberg

16-06-2025

CC-Transcript
00:0072, Brent. What should it be trading at? Knowing the headlines that we know? Actually, you think, given the fact that we haven't lost any supplies. The market is probably, you know, fairly priced, probably a couple of dollars higher would also be fairly justified. Where I do worry about this market is that it's probably become a bit too complacent, that there won't be any supply risks now or supply outages. We're not saying that's definitely going to happen, but we did see some outages, right? We saw Israel take out attack from in South Pars 14 in Iran. That's definitely led to some losses in condensate and LPG. Gas production has also been affected. So it's not nothing. And I do wonder if the market's just completely dismissing the possibility that, you know, there will be any supply outages whatsoever. But you've seen a lot of the volatility today. Yeah, exactly. Falling down from where it was on Friday. So putting the Strait of Hormuz aside, if we do get some strikes and there are outages in the oil and gas market, can the Saudis make up for that? Can the US make up for that? Who makes up for that? Great question. I mean, look, Opec+ is increasing production already at an accelerated pace. You know, they do have spare capacity. Again, that does mean if there's a genuine outage over millions of barrels a day, there is fear in the market. But I would also caution that I think within or back in Middle Eastern oil back, there will be you know, I don't think anybody's going to jump in order to fill that gap because nobody wants the situation to escalate. Everything that's going to be done by other countries in the region is going to be trying to de-escalate. That's right. And nobody wants to be seen to be taking advantage of a situation. But of course, if there is a genuine outage, you know, Opec+, it is adding barrels and I think they will continue to do so to mitigate any of those risks. I'm curious as to what the situation was like for the oil market prior to this. And I know at least certainly here on the U.S. side, looking at the CFTC data, you definitely had a market that basically saw oil prices continuing to drift lower or at least to stay low where they had been. What were the potential upside catalysts? You know, now, of course, you know the military conflict right now between Iran and Israel. I'm glad you asked that question, you know, because last month, literally just about a month ago, we put out a piece that was called The Pain Trade. And this was exactly something we were highlighting, that the market had continued to go short and probably to early in our balances, are calling for a build in Q4 and 2026. But right here, right now, inventories are very tight. China's buying for its SVR and OPEC+, even though production is increasing. Exports happened because Middle Eastern summer burden is high and demand is high. As a result of that. We're not seeing a market that is losing the front. And our point was that you might actually get these shorts having to cover before the market actually weakens in terms of balances. And that's exactly what was playing out. And of course, the geopolitics has made it worse. With regards, though, to some of the disruptions that we had had because of obviously the sanctions that were already in place in Iran. Obviously the issues going on with Ukraine and Russia, which it also had created some potentially, I guess, upward price pressures here. How much is that adding to the concern? I don't think any of the Russia concerns are in the price. Because generally speaking, President Trump has been very reluctant to put any sanctions on Russia, even though, you know, the wider kind of team or the Europeans are kind of asking him to do so. So that's really not in the price. I think what we've seen in the last couple of sessions has been the Middle Eastern conflict. I think your question is almost suggest I would agree with. I think if there were to be sanctions on Russia, you know, the price could go significantly higher because even if there are workarounds, there will always be arounds. You could easily get 2 to 3 million barrels per day off initial disruptions at least. Right. Which is just more complicated when you don't have, say, Venezuela making up oil, for example, as well. If I'm a producer right now and I'm an oil producer and my hedging these levels and does that make me sort of more immune then to if we do go into the forties or the fifties, like President Trump has made clear he wants? Yeah, I absolutely think that one of the reasons why we've seen the short covering the catalyst has been producer hedging. We did that was another thing, but one that, you know, we are going to start seeing producers hedge because again, if the outlook isn't rosy, they will use any rally. And the last couple of days, according Quantum are pointing out this is one of the biggest increases you've seen in hedging, you know, kind of on a kind of day to day basis. And that again means that, you know, hedging the 2026 part of the curve, the curve flattening and anybody who has been short the December 25, December 26 contract, which, you know, we call it accurate day, they're all getting stopped up. It does mean the producers have some protection for next year, especially, like you said, if prices do go into the fifties next year with the bills. But at the same time, you know, the flipside, of course, is that we don't get the bills because, you know, just generally due to sanctions or whatever reasons that fundamentals end up being stronger than expected, then of course they will be underwater. But as of right now, all our balances do point to oversupply for next year. So the producer hedging would be prudent.