I wrote a few times this weekend on LinkedIn that I don’t expect prolonged oil price spikes to follow US military action against Iran.
The emotional reaction from markets will be real.
US military action against Iran is an understandably provocative undertaking, and human beings respond accordingly.
But the structure of the oil market is well-equipped to absorb exactly this kind of shock.
Here’s one mechanism that’s missing from the wider conversation at this point.
Any meaningful uplift in oil prices will be met with a serious hedging response from producers. And that hedging activity itself will pull prices back down.
You may have heard the quip that in commodity markets, “the cure for high prices is high prices, and the cure for low prices is low prices.” The idea is that high prices motivate more production, and more supply drives prices down.
Hedging is another way high prices are self-correcting. And it works faster than a production response.
Say oil prices spike to $90 per barrel this week. There are a lot of US producers who become wildly profitable at those levels.
As soon as the market presents that opportunity, many will pounce, securing future purchase commitments at elevated prices before the window closes.
There’s some nuance here worth understanding.
You can have an immediate near-term price spike while the longer-term tail, even as little as three months out, moves far less aggressively. In that case, the hedging opportunity is weaker and more limited.
But if the whole curve gets lifted, as we saw with natural gas during Winter Storm Fern, you’ll see aggressive hedging throughout.
Near-term pain, yes. Meaningful long-term disruption? Much less likely.
The deeper point is this: the gap between how markets feel in the immediate aftermath of a geopolitical event and how they actually behave over the following weeks is where most of the analytical mistakes get made.
We have a very different global oil market today than we had even five years ago. The hedging infrastructure, the surplus capacity sitting on the sidelines, and the current administration’s laser focus on keeping prices low all point in the same direction.
The emotional reaction is understandable. The market structure argues for a shorter and shallower disruption than headlines suggest.
