It’s incredible to think that since Russia invaded Ukraine, oil prices have actually dropped from roughly $100 a barrel to around $60 today. There are good reasons for this — too much supply, lower demand in some big consuming countries and even the sense that we overestimate the effect of geopolitics on the market.
In my view, though, they are being underplayed. Huge protests in Iran and threats of a US military strike raised prices by only a few dollars. The threat of a potential trade war with Europe over Greenland then flattened them again. But markets are terrible at pricing political risk, which is by nature illiquid (each political event is, after all, a kind of one-off) and tough to model. Meanwhile, there are other reasons to think that we may be about to see oil prices start to head higher.
Let’s start with Chinese stockpiling. As Gavekal Research pointed out in a client webinar last week, despite the move to electric vehicles and the slowdown in the Chinese construction sector, the country is still buying record volumes of crude. China is clearly building up a strategic petroleum reserve, which is a good idea given the fact that America is becoming a petrostate with a goal, clearly laid out in the Trump administration’s national security strategy, of ringfencing more natural resources.