The time is running out for investors to prepare for a true oil shock

Investors are still enthralled by the AI boom, which has sent stocks to new highs. They also harbour hopes for a short-lived Iran War. But they have not prepared themselves for a doubled price of oil. This window of opportunity may be closing soon.

Market confidence is based on a number of factors, including the artificial intelligence galaxy of hyperscalers and semiconductor manufacturers, as well as 'robust earnings growth. On Thursday, the S&P 500 reached new record highs. The S&P 500 hit new record highs on Thursday.

Physical markets, not electronic futures, are the part of the energy market where the real problem lies. Actual barrels of crude oil and refined products exchange hands. Prices are around $130 a barrel, which is about 70% higher than they were back in February. This includes North Sea Forties as well as Angolan Cabinda and Norwegian Troll. Brent crude futures are trading at around $110 per barrel, or 50% more than they were in February.

Brent oil for delivery within 12 months is now above $80 per barrel, which is 20% higher than the levels of late February.

Tamas Varga is an analyst with energy broker PVM oil Associates. He said, "The physical market reflects the reality of the ground while the futures markets reflect more perceptions and hope."

The physical market is a true reflection of what is happening in the Strait of?Hormuz.

A BILLION BARRELS GONE The Strait of Hormuz has been effectively closed by the war, which affects 20% of the global energy supply. Vitol, world's biggest oil trader estimates that 1 billion barrels of supply may be lost before the market recovers.

Fatih Birol said that the oil prices were not reflecting the current situation. He warned the world to prepare for higher prices. Frederique Carrier is the head of investment strategy at RBC Wealth Management. She says that an oil price shock must last between three to six months in order to have a lasting impact on inflation.

"We're not yet there, but we will be soon", she added, stating that her firm is neutral on equity, but prefers commodity-linked investments, like shipping and warehouses. Jeff Webster, executive of Gunvor Group's global commodity trading company, told the FT Global Commodities Summit in April that oil traders were stress-testing against a scenario where crude prices reached $200 to $300.

The idea that it will be stagflation or fine. We're surprised by that bit, said Andrew Chorlton CIO of public fixed income, M&G.

"That seems to be a bit complacent."

He stated that he was "more tactical" in his approach to fixed income. He looked at the divergence of yield curves between countries and government bonds.

Consumer inflation expectations have risen. Market-based indicators such as inflation swaps show that investors expect U.S. inflation to be around 3.53% within a year, and around 2.75 percent in five years. This is above the Federal Reserve target of 2%. LSEG data show that these measures were closer to 2,4% in February before the war erupted. The euro zone and UK are experiencing a similar situation. Laura Cooper, Nuveen's global investment strategist, said that her firm had AI exposure due to its profitability. However, she was countering this with "dividend-growers", infrastructure and other real assets like real estate and gold mines as a way to hedge against risk.

LONG-TERM TRENDS RISKY?

No matter how big the disruption is, the markets will eventually re-price the associated risks. Supply chains will adapt. Volatility will subside. And investors' focus returns to long-term, major trends. "You won’t know if it's a tipping point until the market reacts," said Paras, who manages discretionary funds for ultra-high net worth individuals in Asia at UBP.

We just need to be flexible and wait. Everyone has their finger on the trigger."

Analysts say that the major risk with the Iran crisis is a shift in these long-term themes. The Trump administration has shook up global trade, international relations and economic security in less than 18 months. Tina Fordham of Fordham Global, a political strategy consultancy, said that the issue is more complex than the end date of the war. It is rather how the "Rupture", or the shift in public opinion and policy, is being played out.

By the time geopolitical risk reaches financial markets and lands on land, it's usually too late to mitigate. Reporting by Ankur Baerjee and Amanda Cooper, London. Editing by Dhara Raasinghe and Topra Chopra.

(source: Reuters)