Energy prices up, markets down

Katie Martin (0:06)

Pushkin. We have war in the Middle East again, Operation Epic Fury. This time, after a slow burn, it's doing some real damage to markets, which suggests some real damage ahead to the global economy, or perhaps more accurately, to the economies of Europe and Asia. Now, before you email us to tell us we're terrible people, no, we don't think markets are the most important thing about the bombing of Iran by the US and Israel, or about Iran's retaliation that's affecting other countries in the region. People are dying, it's grim, and we're not monsters. But the reality is that the economic impact on the world from what happens in the Middle East really matters too. Now, on this podcast, we know what we don't know, so we're leaving the geopolitics to wiser colleagues. Today on the show, we're picking apart the hit to markets and why it all matters. This is Unhedged, the Markets and Finance Podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at FT Towers in London, and I'm joined down the line all the way from New York City. Yes, by the big guy, Robert Armstrong, of the Unhedged newsletter. Say hello, Rob.

Robert Armstrong (1:19)

Hi, guys.

Katie Martin (1:20)

But I'm also joined back by popular demand. We have Jamie Smyth, FT Oil Nerd, to tell us what's really going on. Hi, Jamie.

Jamie Smyth (1:29)

Hello, Katie.

Katie Martin (1:30)

So, let's do a really quick recap. Rob, what is the score? What is going on? And listeners, just so you know, we're recording this on Tuesday, March the 3rd, in the London afternoon. The situation is moving around a lot, but this is the situation as we have it. Rob, what is it?

Robert Armstrong (1:46)

From the provincial point of view, just of markets, I think what we've seen in the last 24 hours is a change in basic expectations. I would say Monday morning, when markets opened, market prices of everything from oil to natural gas to stocks to gold to treasuries, were telling you that we were looking at a short tidy conflict in the style maybe of the intervention in Venezuela earlier this year. And what's happened since then is that Iran has demonstrated some ability to drag things out and widen the conflict. And so markets are...

Katie Martin (2:32)

So it's retaliated, right? So the bombs fell on Iran.

The leader who had been, you know, been leader for decades was killed. A lot of other, the top military and political leadership were also killed. Civilians lost their lives. And Iran retaliated and started chucking rockets in the direction of the United Arab Emirates. So as you say, it kind of went from just an Iran thing to a regional thing.

Robert Armstrong (2:58)

Yes. And there's been hits on things like oil infrastructure. There's been hits across the Gulf region on US bases. So the markets are struggling now to reprice a rather more unpleasant reality than they were expecting a day or so ago.

Katie Martin (3:19)

So, Jamie, let's start on this sort of energy side with oil. We've seen oil prices come up quite a lot. The European benchmarks, that Brent is at $84 a barrel. The US benchmark, WTI is at $76 a barrel-ish. Is that a lot?

Jamie Smyth (3:38)

Well, I think if you compare it to December, it is a lot because then you had oil, you know, just hovering around $60.

So that's about a $25 geopolitical risk premium that's been bid into the price. So that is a significant amount. But I think, you know, what most analysts are really concerned about is, do you get to the $90 to $100 level? And that's really the level which starts to bite into economies across the world. You start to get a lot of inflation and it starts to put a question on the central banks and whether they can cut rates again. So I think, you know, if this is a long drawn out war, we're certainly going to see those oil prices creeping up to those levels. So that, I think, unnerves investors.

Robert Armstrong (4:26)

Just to give a bit of context here, in 2022, which is the year Russia invaded Ukraine, oil peaked at 115, natural gas, which you should also talk about with Jamie, really went bananas, and there was very significant world economic implications.

Katie Martin (4:49)

But so, Jamie, like, for people who, you know, don't know the details here, why hasn't oil just gone straight to $100 a barrel? Because, you know, I think, actually, a lot of people overestimate how much oil Iran supplies into the global system. It's just not as big of a deal as it used to be.