Publications: Notes at the Margin

A Sea Change for Oil? (April 22, 2024)

 

On April 14, Iran launched a fusillade of drones and rockets against Israel, increasing the risk of a larger Middle East conflict. Prices would have shot up had firms in the oil market responded as they have in the past. Instead, prices fell. Every market analyst offered an explanation. All were wrong. The oil market’s structure has been permanently changed by the war in Ukraine, the failure of hedging strategies, increases in interest rates, cuts in credit availability, the use of strategic stocks, and the realization by industrialized nations that the economic impact of energy shocks can be marginalized.

 

This assessment was strengthened after Israel fired retaliatory cruise missiles into Iran. Prices rose during early trading in Asia as they had in past crises. Within hours, though, they had declined from the previous day’s close.

 

We attribute the absence of response to the unwillingness of those who buy real barrels to be influenced by the “jackals”[1] who now dominate the world of oil futures and options. As an example, we note that the jackals held call options on more than five hundred million barrels to be delivered in June with strike prices above prevailing prices at the end of business on April 19. These options—called “lottery tickets” by some commentators—have altered market behavior, with prices rising as the tickets are bought and then crashing when the tickets expire worthless. The increased number of exorbitantly priced lottery tickets has transformed the oil market’s structure.


[1] “It’s not an obscene word or a profanity no, but it could be used as a personal insult in that to call a person a jackal implies you consider them morally unscrupulous and yet cowardly and also accuse them of being the type of person to benefit from someone else’s effort whilst that person is disadvantaged by them and their group’s behaviour. As such it would be an offensive term to have used about you.” Suzanne Birchall, “Is ‘jackal’ a bad word?” Quora [https://tinyurl.com/ens4vbja].

 

 

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