[Salon] Oil and a case of cognitive dissonance - ArabDigest.org Guest Post

Oil and a case of cognitive dissonance Summary: put to one side prospects for an Iran/US deal. Deal or no the world now faces an imminent and unavoidable severe energy ‘crunch’. The big ‘unknowns’ are when exactly it will hit, how high the oil price will go and how long it will be before it reverts to something like ‘normal.' We thank our regular contributor Alastair Newton for today’s newsletter. Alastair worked as a professional political analyst in the City of London from 2005 to 2015. Before that he spent 20 years as a career diplomat with the British Diplomatic Service. In 2015 he co-founded and is a director of Alavan Business Advisory Ltd. You can find Alastair’s latest AD podcast (with Jim Krane) here. The buffers and the shock absorbers are being steadily drawn down, and the ability for the market to absorb this imbalance is drastically diminished today versus where we started. Mike Wirth, CEO Chevron, 28 May 2026 With Brent crude seemingly range-bound between US$ 90 and US$ 100 per barrel (pb) for almost two weeks now, it would be easy to conclude that either the doom-mongers have got it completely wrong or that investors remain in total denial. However, this is far from being the case. What we are actually seeing is no more than a reflection of how futures markets work — or, if you prefer, do not work! — as I outlined in the 23 April Newsletter. In short, as the FT’s Jonathan Vincent and Malcolm Moore wrote on 15 May, commodities markets are not a “crystal ball.” The fact is that investors understand fully that a further sharp rise in the price of crude oil is both imminent and unavoidable, even in the still seemingly unlikely events of: a) Donald Trump’s latest assertion that Iran and the US could finalise a deal “over next week” coming to pass; and, b) ’Normal’ traffic through the Strait of Hormuz resuming immediately. Indeed, if the recent dropping of claims by the US Administration that gasoline prices would fall sharply as soon as a deal is reached and Mr Trump’s (totally bogus) claim that voters care more about stopping Iran acquiring a nuclear weapon than they do about their pocketbooks are anything to go by, this stark reality seems finally to have been grasped even in the White House. Despite Brent crude temporarily stabilising between $90 and $100 per barrel, experts warn that an imminent price spike to at least $150 is unavoidable due to record-breaking depletion of global inventories and strategic reserves. So — and acknowledging that a 30 April article in The Economist was correct to assert that “markets have a poor record of pricing geopolitical risk” — why are we seeing here such an apparently blatant case of cognitive dissonance? Putting to one side Mr Trump’s repeated — and very largely unsubstantiated — efforts to talk down the price of oil, there are three major ‘real world’ factors in play here. First, no-one knows exactly when the “future price spikes” of which the authoritative International Energy Agency (IEA) warned in its 13 May 'Oil Markets Report' will occur. As Chevron’s Mike Wirth (quoted above) went on to say at Bernstein’s 28 May conference: Over the next few weeks, we’re likely to see those pressures flow through more directly to physical prices and there’s more upwards pressure that I would expect as we get into June and certainly into July. Underpinning this is the fact that global oil consumption has been running at about six million barrels per day (bpd) above production since 28 February according to the IEA (with some experts putting it higher still) — i.e. as Malcolm Moore et al put it for the FT on 17 May: "Since the outbreak of the conflict, the world has been existing beyond its energy means." To fuel this: a) Governments in developed countries in particular have been releasing about 2mbpd from strategic reserves, a rate which is unsustainable beyond the end of next month at the latest; and, b) Oil companies, traders and refineries have already released the majority of their inventories (totalling around three billion barrels globally in late February) into the system and are now rapidly reaching the point where they must hold on to what they have remaining in order to avoid damaging vital oil-related infrastructure. Second, even in the event of ‘peace’ breaking out in the Gulf no-one can be sure how long it will take for exports of oil (and gas) from the region to revert to something like the status quo ante. However, it is worth noting that Adnoc Chief Executive, Sultan al-Jaber, warned on 21 May “It will take at least four months to get back to 80 per cent of pre-conflict flows and full flows will not return before the first or even second quarter of 2027.” Third, the impact on future demand of emergency measures in around 80 mainly developing countries so far (according to the IEA) and of rising fuel prices in developed countries remains to be seen as (again quoting Malcolm Moore et al): Demand for air conditioning and holiday travel at the start of the northern hemisphere’s summer will put further strain on supplies of crude oil, gasoline, diesel and jet fuel, when global stocks are already falling at the fastest rate on record. Nevertheless, what does seem certain is that more emergency measures (e.g. fuel rationing) and still higher prices at the pump etc. are irrevocably in the proverbial pipeline. Pull all this together (and putting to one side a propensity for headline-grabbing hyperbole among some analysts) and it is hardly surprising that expert opinion is now leaning increasingly firmly towards a minimum, but still record-breaking, oil price of US$ 150pb (i.e. more or less double the pre-war price) to restore supply/demand equilibrium, with some considering — “very seriously” in the case of Aberdeen’s chief economist, Paul Diggle — possible spikes of up to US$ 180pb. While prices even at the lower end of this range are bound to lead to a sharp fall in demand which would ultimately help to bring prices down again, it is worth bearing in mind too that any easing is likely to be moderated by the urgent need for both governments and the private sector to replenish reserves in preparation for the (inevitable) next crisis. All this being said — and even though we are approaching mid-year when I habitually review my oil price prediction for 31 December — I am still very disinclined to make a (revised) firm forecast for year-end. But I am willing to put it on the record that I am really struggling to imagine a price as low as the US$ 80-90pb range which the market is currently favouring and which is, indeed, a case of cognitive dissonance!