Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Oil Is Tumbling Despite Strait of Hormuz Tensions
Transcript
- Lucas: So crude oil had another rough week. WTI settled near sixty-nine dollars a barrel Friday, down about seven and a half percent in five days. That's a big move for a single week. Luna: And it happened while a tanker was actually struck in the Strait of Hormuz. That's normally the kind of headline that sends oil higher, not lower. Lucas: Exactly. The Strait of Hormuz is the world's most important oil chokepoint. About twenty percent of global petroleum consumption passes through it daily. A military incident there usually adds a five to ten dollar risk premium overnight. But this time, the market barely budged on the news, and then kept selling. Luna: So what's overpowering the geopolitical risk? It has to be demand. Lucas: It's almost entirely demand. The macro picture deteriorated quickly in late June. The latest PMI data from the US, Europe, and China all came in weaker than expected. China's manufacturing PMI slipped back into contraction territory. And the Fed has signaled rates stay higher for longer, which is tightening financial conditions globally. Luna: Right. So traders are looking at an economy that's slowing and saying, we don't need as much oil in the second half of the year. Lucas: Precisely. And you can see it in the futures curve. WTI is in contango now — that means front-month contracts are cheaper than contracts further out. When the market worries about a glut today, the curve slopes upward. Six months out, oil is about three dollars higher. That's a signal that storage is filling up. Luna: The other side of the supply story is OPEC+. They've been cutting production for over a year. But it seems like the market is starting to doubt that those cuts are holding. Lucas: Yeah, compliance has been slipping. Iraq and Kazakhstan have been overproducing. And Saudi Arabia needs a much higher oil price to fund its budget. The IMF estimates Saudi needs oil above ninety dollars to break even. At sixty-nine, they're losing money on every barrel. That creates tension inside OPEC+ about whether to cut deeper or start a price war. Luna: So the geopolitical risk in the Strait is real, but the market is saying 'I don't care' because the bigger story is demand falling off a cliff. Is there any scenario where the supply disruption actually matters? Lucas: If the Strait were actually closed for more than a day, yes. But the market is pricing that as a tail risk — low probability. The tanker that was struck wasn't sunk, traffic resumed within hours. Iran doesn't want a full blockade; they'd lose their own export revenue. So traders are putting geopolitics in the 'noise' bucket and focusing on the economic data. Luna: That's a smart framework. And speaking of the economics that actually drives this show — we get to do these deep dives every day because a handful of listeners chip in monthly at buy me a coffee dot com slash fexingo. It's ad-free, listener-supported, and that support is what keeps the lights on. Lucas: Yeah, honestly it's a small group that makes it possible for us to spend time on episodes like this, where we can really drill into one number or one event. If walking through the economy with us has made something click for you, that's the place to help keep it going. Luna: No pressure at all. Just a quick honest beat. So back to oil — where do you see WTI heading in the next month? Lucas: If the macro data keeps softening, I think we test the June 2023 lows around sixty-five dollars. The next big catalyst is the July fourth US driving season demand read. Gasoline demand has been tepid so far. If that disappoints, it's another leg down. Luna: Interesting. And what about the speculative positioning? Are hedge funds piling into the short side? Lucas: Yeah, the latest CFTC data shows managed money added significant short positions in both WTI and Brent. The net long is the smallest it's been all year. That's consistent with a market that's convinced demand is slowing. Luna: So the trade is 'sell any rally' until something changes on the demand side. Lucas: Exactly. A supply shock could reverse that in a heartbeat. But right now, the market is saying the demand story is the only thing that matters. Luna: Let's talk about the other big mover in commodities this week — natural gas was relatively flat, down only 0.7 percent. That's actually a huge divergence from crude. Lucas: Nat gas is a different animal. It's more regional, and the US market is focused on storage levels. We're coming out of injection season with inventories above the five-year average. But there's also a heat wave building across the South, which could boost cooling demand. So the market is basically treading water. Luna: Gold also slipped again, down 2.5 percent on the week, now just above four thousand. I thought geopolitical tensions would push gold higher. Lucas: Gold is in a weird spot. Real yields are rising because the Fed is hawkish, and that's a headwind for gold. The dollar is also strong. So gold is caught between safe-haven demand and a tightening monetary environment. The ten-year breakeven inflation rate dropped to 2.20 percent, which suggests inflation expectations are cooling. That removes some of the gold inflation-hedge narrative. Luna: Silver got hammered, down almost 10 percent. That's a much bigger move than gold. Lucas: Silver is more volatile because it's got industrial demand. About half of silver demand comes from industrial applications — solar panels, electronics, brazing alloys. When the economic outlook sours, silver gets hit on both the industrial and the monetary side. It's basically a leveraged play on gold and growth combined. Luna: Coffee was the outlier — up 3.5 percent. What's driving that? Lucas: Coffee is weather-driven right now. There's concern about dryness in Brazil, the world's largest producer, ahead of the flowering period for next year's arabica crop. The market is pricing in a potential supply shortfall. That's a classic agricultural commodity story — local weather shock overrides the macro headwind. Luna: So coffee traders are watching rain forecasts, not PMI data. That's a good reminder that commodities aren't a monolith. Lucas: Right. Each one has its own micro fundamentals. That's why we drill into them individually on this show. Luna: Alright, let's wrap with a forward look. Next week, what's the key number to watch? Lucas: I'd say the weekly EIA inventory report on Wednesday. If we see another large crude build, that confirms the demand story. Also keep an eye on the ISM manufacturing PMI on July first. That's the first big US data point for the third quarter. Luna: And the geopolitical wildcard. Lucas: Always. The Strait of Hormuz isn't going quiet. But the market is telling us right now it's not the main event.