Oil is at $90 a barrel today, up about 35% on the week, which apparently is the largest weekly increase ever recorded, and up 12% on the day. That is a supply move, not a mood swing. The oil market is jumpy right now and it has good reason to be. I would discount some of today’s 12%, because oil does tend to move around on Fridays, but you cannot discount a 35% week.
Why is it a supply move? Very simple. Oil production in the Gulf has been thwarted by the effectiveness of Iranian drone technology. We have been watching this dynamic for a couple of years now, with the Ukrainians using the same approach effectively against the Russians. Low cost, high tech weapons destroy oil production and military installations at a small fraction of what it costs to defend them. The same weapons are wreaking havoc on population centers in the Gulf, which is its own serious problem.
This is day seven of the operation, and it helps to be clear about its three objectives. First, no nuclear weapons for Iran. Second, cut off Iran’s ability to finance the export of terrorism around the region and beyond. Those two are straightforward. The third is trickier: maintain the supply of oil to the global economy so it can keep growing, while at the same time reducing political support from regimes that are unfriendly, meaning China and Russia. That third one is not working very well right now, and the price of crude is the scoreboard on it.
Look past the daily tape and the markets are telling you this ends in about a month. My own read is that things stabilize in the weeks ahead. Not everybody agrees with that, and I could be wrong. What I would tell any portfolio manager is that the market is not going to pay you for certainty in this tape. It pays you for being able to hold a probability while the headlines swing.
