Brent and WTI opened higher by around 12% – the largest one-day spike in years. Undoubtedly, markets expected Oil to gap higher, but how high will Oil trade remains the question. Early European trading has witnessed traders pare back a portion of the opening gap, with WTI and Brent trading 8% higher at US$72.23 and US$78.85, respectively.
As we know, the Strait of Hormuz, through which roughly 15 million barrels per day of the world’s Oil flows, has all but ground to a halt. If this waterway remains closed for an extended period, the price of Oil will continue to climb, with some analysts already eyeing US$100. I read that there are capabilities to divert about 25% of the 15 million barrels through a pipeline to Saudi Arabia, but there will still be about a 75% shortfall.
From the charts, WTI demonstrates scope for further outperformance, targeting US$76.00, with any break of this base effectively clearing the runway to US$80.00.
Also outperforming are Gas prices. European gas futures are up by around 20%, with natural Gas futures up by around 3.3%. While Oil is catching most of the headlines, the fact that about 20% of global LNG transits the Strait has largely bolstered price action. Interestingly, I read that Goldman Sachs recently noted that a one-month closure to the Strait could fuel a 100% rally in European Spot Gas prices. Should this come to fruition, this would surpass that even seen in 2022 when Russia invaded Ukraine.
The Haven Trade
In addition to Spot Gold catching a rather solid bid and nearing all-time record highs of US$5,598, market participants have been shifting into the usual safe-haven instruments. Spot Silver rose 1.7%, and the USD has been rising as a hedge, bid against all other currencies right now. Of note, the buck has outperformed other typical safe-haven currencies, such as the JPY and the CHF, which both tend to attract demand in times of global turmoil.
In the Bond market, however, US Treasuries initially opened lower, but the move was really nothing to write home about, and, as of writing, yields are moderately rising across the curve. Could this be a case of investors moving funds out of Bonds into the USD?
I am wondering whether this subdued reaction in Bonds could have something to do with the fact that, if Oil prices continue to rise, this would impact inflation and prompt the Fed to remain on hold for longer than expected. I have seen a very moderate hawkish repricing in Fed fund futures, down from around 60 bps of cuts by year-end to 57 bps.
Stocks and Crypto
Equities offered limited refuge. Overnight in Asia, Japan’s Nikkei 225 dipped by 1.4% at the close of trading today, with the TOPIX shedding 1.0%.
In Europe, major Stock Indexes followed suit and are down across the board, and US Stock equity index futures are down around 1% for the S&P 500, Dow Jones, and the Nasdaq. As you would expect, Airline Stocks plunged in European markets as Middle East aviation largely remains grounded, while Defence and Energy Stocks are bid.
I have to admit; in terms of the Crypto space, I was expecting a more pronounced reaction in BTC than in other risk assets; we are actually seeing BTC modestly bid.
What is this telling us? Of late, BTC has been trading more like a leveraged high-beta risk asset. Its resilience this morning suggests a nascent ‘safe-haven’ bid. However, the modest nature of this rally compared to the aggressive flight into Gold and the USD indicates that BTC has not yet decoupled from risk assets. It remains in a state of transition, caught between its reputation as ‘digital gold’ and its reality as a leveraged liquidity play.
Written by FP Markets Chief Market Analyst Aaron Hill and Content Writer Miltiadis Skemperis
