Oil trades on fear, not just barrels, as geopolitics and prediction markets take hold

Business Times

5 days ago

[SINGAPORE] When even Goldman Sachs is tracking crypto-based prediction platform Polymarket to get a read on the risks facing oil markets, you know something's shifted.
On Monday (Jun 23), Goldman Sachs warned that Brent could hit US$110 a barrel if the Strait of Hormuz is blocked, citing Polymarket, showing how even prediction markets with low liquidity may be shaping sentiment.
But while some are treating this Manhattan-based market platform as a new kind of geopolitical barometer, others like Singapore continue to keep its doors shut on grounds that it's an illegal gambling site.
Regardless of where one stands, it says a lot about how oil is being traded. Less than a fortnight since Israel's airstrikes on Iran, markets appear to be not just reacting to fundamentals (supply and demand) but also probabilities.
At the heart of the oil markets' guessing game is whether Iran will move to shut down Strait of Hormuz – one of the world's most important waterways for fossil fuel transportation, particularly oil and liquefied natural gas. Over the weekend, Iran's Parliament reportedly approved its closure.
On Monday morning, Polymarket showed a 43 per cent chance that Iran would close the waterway before July. By evening, that probability had nearly halved and on Tuesday morning (Asia time), it plunged below 5 per cent after US President Donald Trump announced a 'complete and total' ceasefire between Israel and Iran.
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The odds are likely to shift again to reflect the volatile times.
Oil prices have been swinging wildly. Iran's latest move, firing six missiles at US bases in Qatar, should have pushed prices up, but instead they slumped. The reason? The Strait of Hormuz remains open, and crude is still flowing.
This suggests that traders are no longer just chiefly reacting to supply but are also trying to read intent. History shows that during extended Middle East flare-ups, fear alone has added US$20 to US$30 a barrel – proof that sentiment can outmuscle fundamentals when geopolitics takes centre stage.
That's not to say fundamentals have left the building altogether.
There remain key factors that could blunt some of the upward pressure in the commodity's prices. For one, the Organization of Petroleum Exporting Countries and allies (Opec+) has room to pump more, suggesting that the oil cartel has both the capacity and motivation to respond if prices rise too fast. Global inventories aren't exactly scraping the bottom either while slowing economies are weakening energy demand.
Iran pumps about 3.4 million barrels of oil a day and still exports a significant volume of oil despite US sanctions, with much of it flowing to China. That trade keeps its economy afloat but also limits its ability to escalate. Closing the Strait of Hormuz would risk cutting off its own revenue lifeline.
This is what makes its next move hard to predict. Teheran has the capability to cause chaos, but also every reason to show restraint.
A prolonged oil rally is bad news for rate-cut expectations, especially in Asia where policymakers were hoping for some breathing room. If oil prices climb to US$110 to US$120 a barrel (under pundits' high-risk scenario) and stay there for over three months, analysts warn Asia could face a 'stagflationary shock'.
In that scenario, central banks may be forced to tighten policy instead of easing, worsening the slowdown. We've seen how that story plays out. And this may be the fear factor keeping markets on tenterhooks.