Wildest day for oil ever

So is the US conflict with Iran over? I'm not just trying to be a smart ass here, I genuinely don't know. Earlier this week, Donald Trump said the conflict was, and I quote, very complete, pretty much, while his Secretary of Defence Pete Heggseth outlined a plan for the next phase of the bombardment. An enterprising reporter somewhere asked Trump to explain which it was. Very complete or still underway? The answer?

You could say both. Confused? Well, welcome to the club. But investors seem pretty sure they've spotted a taco. T A C O you guys, Trump always chickens out. Oil prices have dropped back and stocks are picking up. Today on the show, what do investors really make of this war and what is our best

This is On Hedge, the Markets and Finance podcast from the Financial Times. And Pushkin, I'm Katie Martin, a markets columnist at FTHQ in old London town. And I'm joined all the way from the Big Apple, New York City, by His Excellency, the very Reverend Robert. Robert Armstrong off of the unhedged newsletter. Rob, like seriously, what is going on? Congregants.

At Our Lady of Eternal Liquidity, peace be with you. And it's really hard to say what markets are responding to is not anything about the world outside of Donald Trump's head. They're purely responding to the fact that what he signals very strongly yesterday with those comments. Was he? So yesterday being Oh, I'm sorry. Monday with those comments was he's looking for the exit. He's had his fun, he's dropped his bombs, and now he's looking to talk about, think about, do other things.

That doesn't mean anything has changed on the ground necessarily. But the markets were anticipating and now they have received confirmation that in the president's eyes, he wants this thing to be over. And that's a meaningful fact, even if the facts on the ground war-wise haven't necessarily changed between last week and this week.

So, you know, you you use the phrase taco. I'm hesitant to use that here, not only because it's kind of a joke and this is a war, but also using that term creates the impression that Trump can just close the door on this thing. Yeah. And I don't think this is that kind of a situation. There are other people

involved to say the least. Yes. So uh the Iranians might have a couple of words to say about whether this war is over. So might the Israelis. So that that's something that this is not Liberation Day. Trump's tariff announcements in April, where when he chickens out, they are over, right? He is in charge of that. In a way, he is not in charge of this. Yeah. So everyone's talking about this in terms of it being like a taco thing. As you say That might not be right for a number of reasons, but

One thing that we do know is that we know what we don't know and so we're not gonna get into the geopolitics because we've got much, much cleverer colleagues who have got a better read on all of that stuff. But we do know that even ahead of this move by Trump to back away, I think we're safe to to call it that, markets like never really

took this that seriously in the first place, right? They always thought he would back away at some point because we had some big moves in markets, like the oil price obviously shot higher.

But it was never like panic stations. Well, uh let's talk about the oil price first. I mean I think We did see a big move up in oil. Probably not coincidentally, that was the night before Trump made his comments. So if you wanted to build out uh a narrative around Trump realizing he'd gotten in um over i into the deep end of the pool and was paddling furiously towards the shallow end.

You would say he saw oil get into the danger zone, both economically and in terms of the gas price, therefore electorally and so forth. And he decided he needed to turn things down. Let's talk a little bit about gasoline prices actually in in the States. So they went up sixteen percent in a week. Yep. If you're wondering, listeners, that's a lot. So um that gets you to pretty much three dollars fifty a gallon.

Uh American like weirdly focused on petrol prices, aren't you? It's true. We do drive a lot here. Certain voters are very exposed to the gasoline price. Agriculture people are very exposed to the gasoline price. Obviously people who commute a long way, which is a lot of Americans. A lot of suburban Americans commute a long way. And sustained one hundred dollar plus oil you would have seen a much bigger than sixteen percent move up. So that that was electorally bad. But there is a somewhat

complex point to be made here about the oil price, which I am afraid to say involves the futures market. So now we are gonna get into some nerdy stuff. So oil, you know, you can buy it for right now. And you can also make a contract with somebody to buy it later. You can buy it next month, two months from now, a year from now, whatever you like. And there's a big deep liquid market for these futures contracts. And the difference in prices along that series of months is called the future score.

And you know, the the difference in those prices tells you something about people's expectations about the world and what we saw in the oil curve. was that front month's futures, in other words, I I want to buy oil for right now, went absolutely banana. But we never saw a big response to this war in the further out prices, the price for two months, three months, four months for now. And indeed the the steepness

the r the the wild way in which prices fell down as you go further out into the future was l like historic. I was talking to oil analysts and traders yesterday and they were like, this is the steepest we've ever seen it. And what that's telling you is Everybody was like, Holy crow, it's gonna be hard to get the oil that we need and we're gonna have to pay up for it right now. But in a month or two, everything's gonna be fine. And the market really stuck to that view, I think.

There's a fun story um by our colleague Malcolm Moore on Ft.com today about like oil traders saying, This is the craziest week in trading oil I have ever known. Now bear in mind Six years ago in during the COVID shock, the oil price went negative. You had to pay people to take it off you because there was no storage left because the market went completely bananas in in lockdown. Even bearing that in mind, oil traders are saying, this is some crazy stuff. Absolutely wild.

On Friday, we're in the mid eighties. Late in the weekend, overnight Sunday, early Monday, we get as high as one nineteen. The prices we speak, eighty six. They've never seen anything like it. Like there's some pretty exhausted people on energy trading floors at the moment. But again, if you wanted to buy oil for two months from now

It wasn't so crazy. That's the oil market in the way the oil market can, telling you what the expectations of the world are. And a lot of people said a lot of these oil traders said to me The idea of having the Strait of Hormuz closed for months is so economically catastrophic that something would happen to change that, whatever it had to be. You know, the world would change. I mean that's a fifth of the world's supply goes through there.

There's a little kind of ch well, little channel of water, but in relative terms it's a little channel of water that goes through this like incredibly important pinch point in the Middle East, in the Gulf, around where oil flows around the world. Iran has done a pretty good job of saying you shall not pass through this

straight just by, you know, chucking the odd drone in its direction or the odd missile in its direction. And as you say, that is the absolute worst case scenario, or it's certainly among the worst case scenarios, which is that literally that passage of water is just completely shut down. And then you get oil going to a hundred and fifty dollars a barrel, you get it going to two hundred dollars a barrel. You know, really quite apocalyptic stuff starts happening.

And by the way, Katie, we should mention for the listeners that it would would be a delayed effect, because there is a certain amount of oil inventory out there in the world in big tanks, floating around on ships. wherever. So it's not like you You close that straight and there is an oil crisis immediately. When the strait closes, that's when the horrible clock starts ticking.

Yeah. Right. As all that floating storage and online storage starts to work its way down. Which is why by the way we we heard this week there was talk about oh, maybe we should ease these sanctions on Russia. Right? Because it's like if we can't get it through the straight, we can't screw around having the second biggest producer in the world.

Right. And not being able to sell their barrels to everybody. But the other thing that pulled the oil price down, you know, yes, it's this statement from from Trump, but also the big economies got together, like the G seven biggest economies, biggest developed market economies in the world.

got together the representatives and said, We're going to release some strategic oil reserves, right? That's what strategic oil reserves are for. They're there to relieve the these these pressure points. And so You know, that is a sign, isn't it, that it's not just, you know, politicians in the US, it's politicians globally can see this is why we are so laser focused on on on geopolitics in the Middle East, because it is just this

Pinch point that can screw over everybody's economy all at once by making energy incredibly expensive. And indeed, what we saw in other market prices. was the way that other economies, particularly in the UK and Europe, are more sensitive to the energy price than the US is. For not you know, for industrial reasons in terms of what kind of business they do and the fact that of course The US has its own sources of oil in the shale patch and so forth.

But man, we saw some you know, there was more action in the stock markets of Europe and Japan in terms of, you know, spooked responses to this war than anything we saw in the US.

Let's just pick that apart a little bit, right? So this is one of the things that I think is really important about how the market responded to the bombardment of Iran. It was not your classic what people call risk-off move, right? It wasn't the classic thing where investors just Scramble into safety. So they were not scrambling into government bonds, they were scrambling out of government bonds because of the inflationary impact of the oil price. Yes. They weren't scrambling into gold.

No. Which they would normally do in a shock. They were getting out of gold because gold has actually been a really successful bet for them over the past few months. Like you look everywhere, there was some weird stuff going on in markets. Yes, the i the stock markets that have been the most popular over the past few months and have done the best, they're the ones that pulled back the most.

Even the Swiss franc, which is supposed to be the place you go to when you're really worried about the state of the universe, that fell back because again, that has been doing really well against the dollar over the past few months. So it wasn't a kind of classic

flight to safety, it was more investors saying, I'm gonna just do some spring cleaning of my portfolio because there's a bunch of things here that have done really well and I'm just gonna take some profits and and cut back a little bit because there is just this weird stuff going on. But it wasn't a kind of Liberation Day, you know, tariff day style, oh my God.

get me somewhere safe right now. It was like different. I think you're absolutely right. And I think the crucial context here is that investors in the equity markets in particular have made a load of money. And what you could see was them unloading the stuff that had worked in the months running up to this event. So it was like a good time to take some profits on your most successful trades. But what we didn't see, for example, was

U.S. equity investors diving into safety plays like consumer staples. On the contrary, because consumer staples had done really well in the last couple of months, they sold off. So it was very strange.

was that oil crises will naturally strengthen the dollar. So that's another reason why we saw international markets weakening in a way that US markets didn't weaken is because they you know, they go down basically when the dollar goes up. So if you were looking at things priced in dollars, the damage looked significantly worse. W one bit of the market that did have a very violent reaction was in very short term government debt in the UK and Europe. So

The UK obviously like we we need oil from the Middle East. We're a lot closer to that part of the world than we are to Ula in the States where you've got plenty of your own oil. So We're very, very reliant on on this particular kind of energy network and there was a real sense of fear at one point that we were gonna have another energy crisis in this country, just like we did after Russia's full scale invasion of Ukraine in twenty twenty two.

So short term debt markets responded pretty violently. They went from pricing in uh an interest rate cut from the Bank of England, which is what you know, people th thought that was what was coming in the coming months. To pricing in an interest rate rise.

So n no, not even going to neutral but almost going all the way to pricing in a rise in interest rates by the Bank of England to tackle higher inflation from higher energy prices. Now To the uninitiated that might not sound like that big of a deal, but there was a lot of hedge funds that were crammed into this bet that UK interest rates were gonna keep on falling, and it has been

brutal for those guys. There's been billions of dollars lost during that process. They'll make it back. They're grown ups, they can handle it. But Yeah. You know, it's kind of worth remembering that this is why governments tend to try and avoid volatility in financial markets rather than creating volatility in financial markets because accidents can happen really easily. Somebody blows up, it like sets off a domino of financial instability.

It certainly sounds like there were like pockets of the of short-term debt markets that really suffered. You're absolutely right that the short-term debt markets That's basically all markets bloodstream, right? Yes. That's your collateral.

that's, you know, how y you know, you have to borrow to keep your trades going, et cetera, et cetera. It's very uh you know, it's it's it really is the circulatory system for markets of the short term debt market. And I was building a chart for the newsletter yesterday of what had happened to short term yields. And you know something big has happened when you have to double check your chart because you can't believe you've gotten it right.

And I was looking at this like forty three basis point move, that's you know point four three percent move in uh in UK short term debt in like a week, and it's like no no that can't be right. Yeah. And and that doesn't sound like a very big number, but when you're levered a hundred to one or whatever it is, which is what somebody who's betting on short term interest rates will do. That is a huge, acutely painful move that will send you running home to mama.

Yeah. It turns out you know, you find out how popular some of these like bets, some of these positions are when they go belly up and it turns out this one was pretty popular. So

Now, what markets are trying to do, and again, this this remains a fluid situation. So if this is out of date in a couple of days, so be it. But what markets are trying to do now is kind of get back to quote unquote normal. Stocks going up, borrowing costs generally coming down, the oil price edging back towards where it was before this whole thing started. My problem with that is You know, yes, uh Trump has said this thing is over or nearly over, or whatever his exact wording was, but

it's not up to him, right? He's not the only human in this process who has agency. Iran still has agency. It has a very messy political situation now. Are you confident this thing is over? I I I have no idea what to think. And it's not just Iran and Israel that has to has to agree. It's also, you know, oil companies and oil traders And oil shippers are all involved too. Somebody has to decide that it's worth the risk to captain a boat through those straits.

I saw a clip of someone on Fox News uh saying, Come on, ship people, be brave. You know, stand up and be counted, take take the ships through the strait. Rob, my question to you is, would you do that? I can barely parallel park my car. So I will not be piloting a tanker through the straits. on the line here to discuss the geopolitics because i if anybody knows

We know it's not us two. So uh w you know w all we can say is what the markets are pricing in. What are the markets pricing in as of this morning, Tuesday morning? US stocks are kind of stable and flattish. Gold is coming back up. the measures of market volatility are still a little bit elevated, like the VIX and the V VIX, which are these markets for basically betting on how much stocks will move around in the next month or so.

They're telling you that some people are out there still hedging their bets a little bit. Yeah. So everybody is taking a breath, that is good, but the markets have not declared that it's truly over. Listen, let's take a little breath of our own and come back in one sec with long short. Hi, it's Helen Pidd here, one of the hosts of the Guardians award winning daily news podcast Today in Focus.

We go beyond the headlines all over the world, talking to the people at the heart of the action, bringing you stories that matter every weekday. Listen wherever you get your podcast.

Okay, it's time for long short, where we go long a thing we love or short a thing we hate. Rob, what you saying? I'm long the necktie. Uh yes. I have written a piece for our sister magazine H T S I. This month, which you can uh look up uh find at uh newsstands near you, saying the tie is back. I think they look great. I think they're fun to wear. Also spats. Just kidding.

Are you anti casualization? Is that what you're saying? Or is it like specifically ties? No, I'm not. I I'm I'm you know, every year people say, Oh, formality's coming back. Obviously that's never happening. I just think the tie is like a fun decorative thing is coming back. Okay. You know where it started. It's a c a kind of fun scarf that men can wear. You know what I mean? Fun scars for men. You heard it here first. Okay. I am long Korean viral food crazers.

An excellent piece on our website today. Apparently Korea loves a food craze. And the latest one is these like do buy chocolate style chewy chocolate cookie things. Yes. And apparently they sell f like they're pretty small. They sell for like the equivalent of four dollars seventy five each. And they've become such a huge obsession, like cues round the block for these things, that apparently they've been using them at centres for blood donation to encourage people to come and and give blood.

Say who? Get chocolate. It seems like a reasonable deal. Like when I go and give blood you get very poor quality biscuits these days. I really think maybe more people would do it if you have better chocolate. Yeah, I'm gonna check one of those things out. Yeah, this is the ticket I'm running on

Listeners, there's m a lot of chaos in the world, but all being well, we'll be back in your ears on Thursday, so listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Tokyo. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler.

FT Premium subscribers can get the Unhedged newsletter for free, and a 30-day free trial is available to everyone else. Just go to FT.com/slash unhedged offer. I'm Katie Martin. Thanks for listening.