Last week turned out to be a rather shabby performance from oil prices which after attempting to resurrect something of a fight back after OPEC deemed the market a little too fragile to accept an oversized acceleration of oil supply, the latter part of the week once again saw geopolitics have its wicked way with proceedings leading to WTI and Brent being sent to lows not seen since the 8th of May. The official scoreboard movement by the main M1 futures markets registered thus on the week; WTI $-1.98/barrel (-3.15%), Brent -$1.80/barrel (-2.79%), Heating Oil -3.19c/gallon (-1.43%), RBOB -4.01c/gallon (-2.16%) and M2 Gasoil, used because of expiry, -$13.75/tonne (-2.06%). Although not exactly a little house of horrors, RBOB made another year-to-date low and entered the realms of pandemic prices which while being explained away as seasonal, cannot but act as another anchor on sentiment. Indeed, if it were not for the much-lauded low-state of global distillate stocks, the eventual settlements might feasibly have been a whole lot worse. 

It is difficult and somewhat crass to partake in a side-by-side comparison on how one war might outdo another on oil price influence, but our collective is in the game of weighing things that are uncomfortable. Apart from ships being diverted away from the Red Sea/Suez Canal corridor and the bombing of Iranian nuclear facilities that saw some collateral domestic oil supply damage, the extension of retribution and war theatre carried out by Israel has not proven harmful to the oil supplies of the globe. The Middle East is always laden with emotion during times of strife, and with a twinning of deeply held land and religious grievances, the area seems just one Archduke Franz Ferdinand moment away from inspiring a world war. Therefore, the sight of President Donald Trump adopting his best Henry Kissinger, the renown late 20th century US diplomat, and doing what he should have done a long time ago by riding to the rescue of a ceasefire between Israel and Hamas; some of the cognitive anxiety is dialled back to a sort of equalisation of the measurable structural effect on oil prices over the last two years. Rightly, our market has been sceptical by voting with price as to any bullish influence on the recent outbreak of violence, it likewise too will wait for proof of a ceasefire that holds for more than just a couple of days. But as with the decaying value in an option trade, the longer peace holds, the more war premium will disappear.  

Nothing new there then, and a tolerable outlook in which a reduction in hostilities and sentiment will aid a grind lower rather than full tip out. Accepting how this conflict has limited bullish influence must be countered by a peace agreement not being overly bearish. What really set teeth on edge in our market on Friday can be sourced back to the US stock market and once again Washington and Beijing. However, as much as the Dow Jones Industrial Average finished down 2.77 percent, the S&P 500 down 2.69 percent and the Nasdaq down 3.06 percent on the week, this was not the start of the ‘crash’ that is beginning to shout very loudly from some quarters of the financial press and even global regulators because of the exposure by investors to AI and tech-stock positioning. This correction holds its roots in a very quickly souring mood in international trade.  

Our fraternity’s justified besottedness with the oil market sometimes leaves us with a blind spot in how other commodities might just be the biggest drivers in political intrigue. Last week, the US government took a direct 10 percent stake in Trilogy Metals, a company that holds the rights in Alaska's Upper Kobuk Mineral Projects, which include deposits of copper, zinc, lead, gold, and silver. This type of ‘state’ interference and ownership would smack of socialism under the measure of most capitalist loving US Senators, but it just goes to show the vulnerability the US feels in its exposure to keeping up with the demand being seen from new technologies. Increased use from EVs, renewable energy infrastructure, modern electronics among a growing list has brought about a realisation of inadequacy, much the same as China must feel in its pursuit of energy independence. Not so much “drill, baby drill” rather “mine, baby mine” then.

It is to South-East Asia’s trading giant where blame finally lands for the mini rout in stock market values on Friday, and it has nothing to do with inflated valuations and pumped up, self-serving, circular investment by Nvidia, OpenAI and AMD. Yes, on Friday China once again wagged an anti-trust finger at Nvidia regarding processors and chip making, and because of the ‘bubble’ narrative flowing through wires, there can be little doubt the news blew a cold wind across the détente in trade negotiations that currently exists between the Administrations of Presidents Trump and Xi. But the initial frosting and icy blast came in the form of rare earths. The International Energy Agency (IEA) estimates that China accounts for about 61% of rare earth production and 92% of their processing. Such data represents an almost monopolistic position and if China denies access to such wealth of elements, it must surely know that a reaction would be short in coming, particularly if the target is the United States. In a curious mimicking of language, new regulations to "safeguard national security" suddenly sees the US military and other parts of American industry unable to get their hands on the parts of the periodic table that most of us have never heard of apart from guessing they all finish their spellings with ‘i-u-m’.  

The Donald did not shirk expectation. He came out, full tariff guns blazing and late on Friday threatened to impose 100 percent tariffs on all Chinese goods “over and above” any existing levies. The chagrin felt by the US President was palpable and he even went as far as to comment on ‘Truth Social’, “there seems to be no reason” to go ahead with the meeting scheduled with Present Xi Jinping in South Korea scheduled for later this month. The reaction of the stock markets reminds us in some small way of ‘Liberation Day’ in April and how economies might react to a full trading spat between the two greatest trading nations on the planet. This may be the reason why Donald Trump tried to ease language by saying the “US did not wish to harm China” over the weekend and the reversal of some of the losses seen across the entire investment suite. Still, any reduction in international trade can only be bearish for oil and hence our joining in with the communal malaise at the close of the week’s business.  

But it occurs to us here that there might be a bullish streak, in this undoubted bearish seam, turn of events. If a trade war does break out between the US and China, Washington will feel little compunction in continuing in not wishing to upset the current diplomatic trade balance by slapping secondary tariffs on those that support Russia’s war machine. The deeply disguised floating exports from Eastern Russia into China’s refineries will be full and fair game and it will not just be Ukrainian drones that physically stop oil flows. Following this stream of consciousness brings forth another curious speculation. If the US once again weaponizes the US Dollar and the international monetary clearing system, will not China wish to accelerate the rundown on how it is reducing exposure to the current global currency marker? One way of doing this is to buy even more Russian oil in dollars before any sanction should set in. If most of the current global crude demand is China’s willingness to tank cheaper oil, there might just be even more incentive for it do so at a higher rate before it is unable. Similar speculative prods will no doubt run rife, but there was another undoubted shift in market considerations on Friday. Whether or not they are seismic remains to be seen, but all are primed once again to test all of our fraternity’s market understanding.  

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