Kar Yong Ang, a financial expert at Elev8, sees two main risks for the markets right now. ‘First, there is the supply risk where any further escalation that knocks out oil or natural gas infrastructure would serve as a major bullish catalyst. Second, there is the uncertainty regarding the duration of the conflict. This does not look like a minor or quick skirmish, and if the intensity of the conflict remains this high, Brent oil prices could potentially reach $90 per barrel’.
What Traders Should Do as the Initial Panic Subsides
Regarding how traders should position themselves, the initial instinct is often to ‘buy the headlines’, but a calm analysis of the data suggests that these rallies in crude oil and Henry Hub natural gas should actually be sold as the initial panic subsides.
WTI Looks Stretched Above the $62-66 Fundamental Range
Once the first shockwave passes, the market will realise it remains well-supplied. Both Saudi Arabia and the UAE possess enough spare capacity to fill the gaps left by Iranian disruptions. Furthermore, these high prices will likely discourage China from buying for its Strategic Petroleum Reserve. Instead, China may pivot toward more Russian crude, which absorbs oil-on-water and reduces the pressure on global demand. ‘Fundamentally, WTI belongs in the $62-66 per barrel range. With prices already touching $75, the risk-to-reward ratio for staying long has become very unfavourable, and traders should look to fade the move as it approaches the mid $70s’, argues Kar Yong.
Henry Hub Faces Weather and Supply Headwinds
Henry Hub natural gas is perhaps the most attractive option for a short position right now. While global LNG prices will certainly surge due to disruptions in Hormuz, Henry Hub remains primarily driven by U.S. supply and demand fundamentals. The correlation between natural gas prices and the tensions in the Gulf is not linear. Concurrently, the latest weather models indicate a significantly warmer start to March – potentially the warmest since the year 2000 – which effectively destroys heating demand. When you combine this with record-high U.S. production, the fundamental pressure is heavily to the downside. ‘This geopolitical lift in gas prices is a gift for bears looking to short the spring contracts near the $3.00 per MMBtu level’, concludes Elev8 analyst Kar Yong Ang.
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