Price Discovery
What the Iran war taught us about the energy markets.
“You know you’re getting old when the candles cost more than the cake.” – Bob Hope
Although it is difficult to say with certainty, there are strong indications that the war in Iran may be past its apex. Yes, the current ceasefire is shaky, hostilities will likely continue in fits and starts, and the reopening of the Strait of Hormuz is unlikely to be accomplished in a linear manner, but the odds of worst-case outcomes—the complete destruction of critical oil, gas, and civilian water infrastructure in the Middle East, or the use of nuclear weapons—seem to be ebbing. Predictably, the deluge of after-action assessments has begun.
There are many questions to ponder. Here is a partial list of some of the big ones: Who won the war? How did the war impact America’s global standing? Iran’s? Israel’s? Was the NATO alliance strengthened or weakened by the war? What does the war teach about the effectiveness of modern weaponry? How will it impact the relationship between the US and Israel, or shape President Trump’s standing on the global stage? What will become of the US dollar, its dominance in global trade, and the effectiveness of sanctions as a tool of coercion? Is the aircraft carrier era over? What other military technology might be made obsolete because of advanced missiles and drones?
Much ink will be spilled in pursuit of the answers to such questions, and we certainly have thoughts on many of them, but our mission is to contemplate how the war impacted energy markets. Some of the price action across the hydrocarbon complex has been downright confounding, leaving many investors frustrated that things didn’t go as they had predicted, or wagered.
History teaches that while price signals are imperfect, they often reflect hard and unforgiving truths. Having studied the behavior of various oil and gas markets throughout the war, we arrive at three important conclusions that energy investors should internalize before committing their capital going forward. Let’s take each in order.