In the weekend that the US-Israeli drones began to rain on Tehran, energy traders across the world’s major financial institutions began to update their strategies.
When they returned to their trading desks on Monday morning in May, they found oil and gas prices soaring amid a market nightmare come true: the unexpected closure of a key trade route through the strait of Hormuz.
“I spent weeks telling our oil merchant to prepare for war with Iran,” said one business analyst at a major European energy company.
“But he didn’t see it. The market was overstocked, and prices were looking higher than they should have been, so he shorted the market. “I’m a fool.”
Changing markets
In the weeks since war broke out in the Middle East, global energy markets have slumped as the conflict escalates as it disrupts the flow of oil on the world market and disrupts vital energy infrastructure that supports the Gulf economy.
Brent crude, the international oil benchmark, registered its highest one-month gain and the biggest daily drop in prices ever recorded. The impact spans the gas, fuel and fertilizer markets; retreat in equity markets and raise fears for the global economy.
Market volatility creates opportunities for traders to make money. But it also raises the risk of serious losses. In a world far from the futures business of hedge funds and investment banks, powerful traders in the market – responsible for the contracts that connect raw materials and gas to customers around the world – the crisis is a commodity crisis with few clear solutions.
“I bet everyone thinks we’re having a lot of fun, watching the price go up. But if your job is to connect goods with customers, then it’s not so much fun. If you don’t know for sure which way the market will go on any given day, you can still lose money,” said one industry source.
In the global race to stockpile, tankers carrying millions of barrels of crude have made a U-turn in the Atlantic as they are diverted to Asia where the crisis is worst. About a dozen super-refrigerated liquefied natural gas tankers have changed destinations in the middle of a journey from Europe to Asia.
From their Swiss headquarters, the world’s largest commodity trading houses – Vitol, Trafigura, Glencore, Gunvor and Mercuria – have attempted to reorganize the world’s disrupted energy supply. If they succeed, the financial rewards can be satisfying.
After the 2022 energy crisis, more than 3,000 Vitol salespeople were reportedly paid about $785,000 each in salaries and bonuses. Shareholder payments to its 450 top executives and salespeople, who also own the company, reached $2.5bn in 2022 and another $2.5bn in the first half of 2023. But the current problem is very complex, and it is estimated that it has 17 times more impact than the suspension of Russian energy.
The Gulf is responsible for supplying a fifth of the world’s oil and gas, a quarter of marine jet fuel and almost half of the world’s supply of urea used to make fertilizers important for agriculture. Now, emergency distribution plans have been put in place in some Asian and African countries, and Europe is bracing for possible shortages in the coming weeks.
‘Fear and Heads’
When a small group of European energy market traders met for lunch in a cafe on London’s Square Mile a few weeks into the crisis, there was only one rule: there was no discussion of the supply shock that was crippling the markets.
“For obvious reasons,” laughed a European gas trader who was present at the lunch. Intelligence is a common way for careful traders to give their market positions, but there is nothing ordinary about the markets they trade today.
After a turbulent few years in which shipping and energy markets have been ravaged by the pandemic, a container ship stuck in the Suez Canal and the conflict in Ukraine, the Iran war brings new uncertainties.
Energy prices are typically controlled by a forensic analysis of market fundamentals: retailers enjoy production flows, refinery demand forecasts and market price trends. But many are already looking to go along with the wave of sanctions against key oil and gas facilities and contradictory statements from Donald Trump.
“These problems have turned the markets into chaos,” the trader complained. “It’s really depressing to feel completely out of control. Forget analysis and fundamentals; it’s all fear and headlines. Your well-respected business strategy can be repeated and published in one article.”
But, despite the confusion, there are many in the industry who are surprised that oil futures prices did not rise above the peak of $ 119.50 a barrel. Prices of organic raw materials bought in the North Sea for fast delivery within 10 to 30 days indicate that the world level will rise soon. On Thursday, they jumped $13 a barrel to $141, the highest level since 2008.
Amrita Sen, founder of Energy Aspects, told CNBC that the price of futures “almost gives a false sense of security that things are not under pressure…
“Oil markets should go up every week when the strait is closed, prices should go up every time the fundamentals break down,” says one trader.
Ahead of the midterm elections in November, US gasoline prices exceeded $4 a gallon for the first time in four years. Trump’s camp has always downplayed the market impact of his military campaign against Iran and assured the media that the conflict will be resolved sooner than expected.
Overall, this strategy worked. Even within the rise of the historical market, oil prices have been reduced repeatedly with each major public guarantee, and remain below where many traders believe that the price of oil can be, despite the deteriorating situation for the supply of oil worldwide.
Basic internal interactions?
Doubtful trading in bearish futures markets and the growing influence of betting markets, including Polymarket, have added to fears that the market could be hijacked by insiders looking to influence trading patterns or turn a quick profit.
In the third week of the war, a lot of business worth $ 580m bet that the price of oil will fall, which caused one of the strongest oil prices ever recorded.
Business time, shortly before the president of the United States said he would “postpone” airstrikes on Iranian factories after “productive” talks with the government, which sparked an internal trade dispute.
The White House has denied that US officials were involved. But the close relationship between the White House and major hedge funds fueled speculation that fund managers may have been briefed on the new announcements.
“I think that some Tel Aviv hedge funds can be very well integrated with the decisions made about the direction of the war, too. There is no doubt that they would be able to use the US hedge funds to carry out business activities,” said the businessman.
Some even think that the US Treasury itself may sell in the market to try to keep market prices down after Doug Burgum, the US interior secretary, said that officials discussed possible intervention.
After this proposal was widely criticized by market experts, the secretary of the treasury, Scott Bessent, was forced to deny that the administration will follow the plans. However, the rumors persist.
Tim Skirrow, a former oil trader and head of products at Energy Aspects, a market research firm, said: “The current administration is very close to the hedge fund and algorithmic trading community so there is probably a leak of information or direct involvement with funds that work for the benefit of the US government.”
The White House is playing a role in keeping near-term oil prices as low as possible, Skirrow said. Its plan to release emergency oil reserves on the market uses a new contract framework in which a ‘buyer’ can request a crude barrel today with a promise to return at least 1.2 barrels per year. This makes sense because current prices are much higher than the initial price in the futures market, Skirrow explained.
“The smart thing is that this forces buyers to go around the market by selling higher prices ahead of the curve, where the problem is, and buying contracts in the spring,” he said.
“It’s a clear example of them trying to keep prices down in the short term,” he said. As US forces amass in the Middle East, the White House’s desire to destabilize energy markets may not be enough to contain prices.
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