Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / The Real Cost of War on Global Oil Markets
Transcript
- Lucas: If you’re looking at the charts this morning, the first thing that jumps out isn’t just that oil is expensive, but that it’s expensive while everything else seems to be taking a breath. Crude is sitting at one hundred five dollars, up nearly three percent over the last five days, and the ten-year Treasury yield just hit a nineteen-year high. It feels like the market is pricing in a scenario where growth slows, but energy costs don’t. Luna: Right, and usually when yields spike like that alongside commodities, it’s a signal that investors are demanding more compensation for holding long-duration assets because they fear persistent inflation. But here, it feels more structural than cyclical. Lucas: Exactly. You have the standard macro headwinds—stocks posting back to back losses, consumer sentiment softening—but then you layer on the specific geopolitical friction. The Congressional Budget Office released a note earlier today quantifying the direct cost of the ongoing conflict in Iran at two hundred forty-six million dollars per day. That is not abstract risk; that is cash burning through the system every single day. Luna: Two hundred forty-six million a day adds up to billions in lost efficiency or destroyed infrastructure within weeks. Does that kind of daily hemorrhage actually move the needle on global supply, or is it mostly psychological? Lucas: It’s both, but let’s be clear about the mechanics. When you lose that much capital daily in a region that acts as a choke point for shipping lanes, the insurance premiums on tankers go up, the freight rates go up, and the risk premium embedded in Brent and WTI goes up. We aren’t seeing a shortage of barrels in the ground necessarily, but we are seeing a shortage of reliable, low-cost transport. That creates a bid under the price floor. Luna: So even if production stays flat, the cost to deliver it rises, which keeps the price elevated. And that gets reflected immediately in the breakeven inflation numbers, right? Lucas: Spot on. The ten-year breakeven inflation rate ticked up to two point three eight percent today. It’s a small move, but it’s meaningful because it shows that bond traders are starting to bake in the idea that this energy shock is going to be sticky. They’re not pricing in a quick resolution. They’re pricing in a prolonged period where logistics remain disrupted. Luna: That’s a dangerous place for the Federal Reserve to be. If inflation is being driven by supply-side shocks rather than demand, cutting rates might not help consumers, but it could weaken the dollar further, making imports even more expensive. Lucas: Precisely. And that’s the trap. Look at the CPI data from early August. Core CPI, which excludes food and energy, was already at three hundred thirty-seven point eight. Now add in the fact that energy is surging. Even if core remains stable, headline inflation is getting pulled up by the very thing the Fed wants to suppress. It makes the policy path incredibly narrow. Luna: And for companies, especially those with thin margins, this is a squeeze. You can’t raise prices fast enough to cover the energy costs without losing customers, but you also can’t absorb the cost. How are the big energy producers reacting to all this volatility? Lucas: They’re actually benefiting from it, but in a specific way. Look at Exxon Mobil. It’s up three point one percent today, trading around one hundred sixty-nine dollars. Chevron is up nearly two percent. These aren’t just riding the wave; they are locking in higher margins on existing contracts while simultaneously hedging future production at these elevated levels. Their capital discipline has paid off. Luna: But isn’t there a risk that if prices stay this high for too long, demand destruction kicks in? People drive less, airlines cut routes, factories slow down. Lucas: Demand destruction is real, but it’s lagging. By the time you see factory slowdowns, the damage to consumer discretionary spending has already happened. We’re seeing it in the retail sector now. Consumers are feeling the pinch at the pump, which means less money for other goods. This is why the S&P 500 is struggling—it’s a broad-based repricing of risk across the entire economy, not just the energy sector. Luna: So the divergence between energy stocks rising and the broader market falling is really a divergence between profit-taking and profit-loss. Energy companies are printing cash, everyone else is watching their margins get crushed. Lucas: That’s a fair way to put it. And it highlights a portfolio imbalance. If you’re overweight in tech or consumer staples, you’re currently fighting a headwind that has nothing to do with your company’s fundamentals and everything to do with global geopolitics. It’s a reminder that beta matters less than exposure when the macro environment shifts suddenly. Luna: I’m curious about the natural gas side of this. Natural gas futures are up almost four percent to two point ninety-four. Is that connected to the same geopolitical fears, or is it a separate dynamic? Lucas: It’s related, but distinct. Natural gas is heavily tied to domestic storage levels and winter forecasts. With the uncertainty around global LNG exports due to the conflict, some buyers are looking for alternative sources, which tightens the domestic market slightly. Plus, if oil stays high, some industrial users switch from fuel oil to gas, adding incremental demand. It’s a secondary beneficiary of the same primary shock. Luna: So we have oil driving the geopolitical narrative, natural gas catching the spill-over, and equities caught in the middle. What does this mean for someone trying to hedge their portfolio right now? Lucas: You stop trying to predict the peak and start managing the duration. Buying calls on oil right now is chasing momentum. A better play is looking at companies with pricing power that can pass these costs on, or defensive sectors like utilities that have regulated returns. But honestly, the best hedge is cash or short-term treasuries until the volatility subsides. Luna: Cash is king when the ground is shaking. But let’s talk about the gold market. Gold is down nearly two percent to four thousand three hundred thirty-three. Usually, when oil spikes and inflation fears rise, gold should rally. Why is it retreating? Lucas: It’s the yield connection again. When the ten-year yield hits a nineteen-year high, the opportunity cost of holding non-yielding assets like gold goes up. Investors are selling gold to cover margin calls elsewhere or to chase the safety of the Treasury bond itself. It’s a liquidity event. In moments of extreme stress, people sell their winners to pay for their losers. Luna: That’s counterintuitive for many listeners who view gold as the ultimate safe haven. It feels like the safe haven is only safe if you hold it until the storm passes, but the storm might force you to sell it mid-storm. Lucas: Exactly. Gold is a store of value over years, not necessarily a liquidity buffer over weeks. If you need cash tomorrow to cover a business expense or a margin call, gold doesn’t help unless you’re willing to take a loss. The current dynamic shows that even precious metals are subject to the immediate pressures of liquidity and yield curves. Luna: This brings us to a bigger question about the nature of modern markets. Are we seeing the end of the era where central banks can easily smooth out these shocks? It feels like the tools are blunter now. Lucas: I think you’re onto something. In the past, a supply shock might have been absorbed by monetary easing. Today, with debt levels so high and political polarization making coordinated fiscal response difficult, the burden falls entirely on the private sector. Companies have to adjust their own balance sheets, and households have to adjust their budgets. The systemic buffer is thinner. Luna: So resilience becomes an individual characteristic rather than a systemic feature. That changes how we think about financial planning and corporate strategy entirely. Lucas: It does. And it reinforces why we focus on specific, concrete data points like the CBO report or the breakeven inflation rate. Abstract narratives about 'markets' don’t help you navigate this. Knowing exactly how much a conflict costs per day, or how yields are moving, gives you a tangible anchor to make decisions. Luna: I completely agree. It’s about replacing anxiety with information. When you understand the mechanism—like the link between war costs, insurance premiums, and crude prices—you can anticipate moves instead of just reacting to headlines. Lucas: Before we wrap up, I want to pause for a moment on something important. We’ve spent years breaking down complex economic trends and market movements for you, trying to make sense of the noise. This show is ad-free because of people like you who believe in independent, deep-dive analysis. Luna: If walking through the economy with us has made something click, or if you’ve found clarity in our discussions, consider supporting the work directly. It helps us keep producing these episodes without interruptions or algorithms dictating the content. Lucas: You can support us at buy me a coffee dot com slash fexingo. Every contribution, no matter the size, keeps this network running and allows us to dig deeper into stories like today’s. Thank you for being part of this community. Luna: Thanks for listening. Let’s get back to the markets. Lucas: Back to the data. One last thing to watch this week: the weekly EIA inventory report. If crude inventories build unexpectedly despite the geopolitical tension, it might suggest that the price hike is purely speculative rather than fundamental. But given the CBO figures, I’d bet on tightness. Luna: Tightness is the theme. Whether it’s physical barrels or political will, things are constrained. Thanks for the breakdown, Lucas. Lucas: My pleasure. Keep your eyes on the yields and your wallet ready. We’ll see you next time.