Transcript: How oil traders called the Middle East war

This is an audio transcript of the Behind the Money podcast episode: ‘How oil traders called the Middle East war’

Saffeya Ahmed
The FT’s energy editor Malcolm Moore tells me that there is an age-old rule in the global oil market.

Malcolm Moore
When war breaks out of the Middle East, oil prices spike.

Saffeya Ahmed
The idea is that if there’s a conflict in such an oil-rich region, it could become scarce. So typically traders buy up as many barrels as possible. But when Iran struck a US air base in Qatar last Monday, it was a major escalation in the recent conflict between Iran, the US and Israel. And the market didn’t spike.

Malcolm Moore
The opposite happened. There was no price rise at all, oil traders started selling, they decided the missiles were for show and they called it right.

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Saffeya Ahmed
Oil traders bet that this war would be shortlived. But how exactly did they hit the nail on the head? Was it luck, or is the way that these traders predict this market changing? I’m Saffeya Ahmed from the Financial Times, in for Michela Tindera, and this is Behind the Money.

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[NEWS CLIP PLAYING]

In the middle of June, hostilities break out between Israel and Iran.

News clips
Israel just carried out a surprise attack against Iran.

Iran retaliates, hitting populated centres in Israel. (Sound of explosions)

Saffeya Ahmed
In trading fire over the next several days, over 600 Iranians die, and nearly 5,000 are injured by Israeli air strikes.

News clip
(Sound of explosion) Another morning of explosions across Iran.

Saffeya Ahmed
There are also 28 Israeli deaths and some 1,400 injuries. I myself have good friends whose families are in Tehran and they have to flee to safety.

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Now as tensions heighten, there’s one part of the global economy that is watching this conflict very closely.

Malcolm Moore
Oil traders, this is their job, especially when things flare up in the Middle East, which supplies around a quarter of the world’s oil. They have to make decisions on whether they’re gonna buy or they’re gonna sell.

Saffeya Ahmed
So to me, these oil traders, I feel like I hear about them a lot, but they’re so mysterious. Can you paint me a picture of your typical oil trader and kind of how they do their job?

Malcolm Moore
So there are lots of different sorts of oil traders, but to make it really simple, there’s one group of oil traders that are trying to move oil around the world to get it to their customers. And there’s another group that are kind of financial players. That’s no different to buying and selling shares or bonds or other commodities. And they’re trying to make money off the movements in the oil price. But the thing that unites these two groups is that they’re both basically assessing the risk every day of there being too much oil or there being not enough oil.

Saffeya Ahmed
And what kind of tools are they using to assess that risk?

Malcolm Moore
They’re looking across all the sort of sources of information they can possibly get their hands on, from open-source intelligence, to social media, to the algorithms that their computers are using to predict price movements, to financial information on the way that markets tend to move.

Saffeya Ahmed
So now this recent conflict starts with Israel attacking Iran on June 13th. You are talking to several oil traders at this point. What are they doing or looking at in the lead-up to this?

Malcolm Moore
So in the lead-up to the conflict, they’re looking at all the information out there. They’re trying to make an assessment on: is there going to be a conflict and how is it going to play out? Is it going be like last October when the two sides traded missiles, but ultimately nothing else happened? Or is it gonna be more serious? And the thing they care about the most is something called the Strait of Hormuz.

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Saffeya Ahmed
Remember that name: the Strait of Hormuz. It’s at the top of oil traders’ minds throughout this 12 days of war.

Malcolm Moore
Now, this is a choke point at the end of the Persian Gulf, and it’s a really narrow strait. It’s only 33km wide. And you know, a quarter of the world’s oil flows through that strait in tankers. And so there’s always been this fear that at some point, Iran, which incidentally has repeatedly threatened to do this, will try to shut down the strait and disrupt the tankers flowing through the Strait of Hormuz. And if that happens, then suddenly the world has a real oil supply problem.

Saffeya Ahmed
With a quarter of the world’s oil supply potentially at risk, the benchmark of global price for oil shifts a bit. It had been hovering around $60-ish a barrel before any missiles were fired.

Malcolm Moore
When fighting started, the oil price jumps from the sort of mid-$60s to the mid-$70s.

Saffeya Ahmed
Even though it is a bit of a spike, Malcolm tells me it’s a significantly calmer reaction than is typical for this market.

Malcolm Moore
You know, in the past, when there have been tensions in the Middle East, you’ve seen really significant rises in the oil price. You know, oil has gone up to over $100 a barrel on previous occasions when there’s been tension in the Middle East.

Saffeya Ahmed
Malcolm, why isn’t the price jumping like that in this case? Like you said, it has gone up over $100 a barrel before. What exactly is different about how oil traders are thinking about this specific situation?

Malcolm Moore
Well, so traders in general are much more relaxed about the supply of oil just because there is so much coming from the Middle East, coming from Opec countries, coming from the US. So they can be more relaxed than they have been in the past about how much oil is available.

Saffeya Ahmed
What Malcolm’s talking about here is an oil supply glut that the world is currently in. And that’s been the case since March, months before this conflict started.

Malcolm Moore
That’s when Opec, which is the group of countries, that group of oil-producing countries that kind of get together and decide how much oil to produce, they suddenly said, oh, actually, we’re gonna start pumping a whole lot more oil.

Saffeya Ahmed
That move was unexpected, but it’s because Opec in part thinks that there’ll be higher oil demand this year. And on top of Opec’s boosted production, the US is also pumping more oil than it ever has before. So the world is sitting on a very comfortable supply. That means that with Iran and Israel going head to head, traders only need to look at one thing.

Malcolm Moore
The oil traders were really looking at the conflict through a very narrow focus and that narrow focus was: will there be a disruption to the Strait of Hormuz or not? And if there is a disruption, what does that mean for that balance between supply and demand?

Saffeya Ahmed
Now up until the Sunday before last, June 22nd, this conflict is only between Iran and Israel. But then . . . 

News clips
We are breaking news now out of the Middle East. President Trump announced the US has attacked three nuclear sites in Iran . . . 

Major US strikes on Iran, now directly involved in this conflict . . . 

The US has dropped bombs and cruise missiles on three Iranian nuclear sites. The president’s speaking just a moment . . . 

Saffeya Ahmed
I don’t know what you were hearing, but a lot of people around me and on social media are all scared that this is a huge escalation, they’re talking about world war three, the mood is very doom and gloom. But what are oil traders thinking at this point? Are they more worried now?

Malcolm Moore
So that’s a really interesting question. Because on that day when the US got involved, when we saw that they’d bombed the nuclear sites, and as you say, we were all thinking, oh my god, this is a major escalation in the conflict, how is Iran gonna respond? I traded messages with an oil market guy, and he said, nope, I think this is gonna de-escalate things. And I said, seriously?

Saffeya Ahmed
Yeah, I was gonna say that I feel like people hear the US getting involved, that sounds like it’s becoming a bigger war than a smaller one.

Malcolm Moore
Exactly, exactly. And he said, yeah, I think it’s going to de-escalate things, because if you think about it, now the US is involved, things are going to end very quickly, right? We don’t want a long drawn-out conflict that stretches on for months with the risk that at any point Iran is going to close the strait. And now the US is involved, things are gonna come to a swift ending. And that was just a very different way of looking at things from anything that I was seeing anywhere else.

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Saffeya Ahmed
So in seeming contrast to everybody else watching this war play out, oil traders are betting that the US getting involved will signal the end of the conflict, not the beginning of a lengthy one. The only wild card in their eyes right now is how Iran will respond to the US’s attack.

Malcolm Moore
So on that Monday, everyone is waiting for Iran’s response. And no one knows what Iran is gonna do. Rumbling on in the background, the Iranians have been saying, we’re gonna close the Strait of Hormuz, we’re gonna target the ships in the Strait of Hormuz, but nobody actually knows what they’re gonna do.

Saffeya Ahmed
Traders scour social media, open-source intel, satellite images, all those things that Malcolm was mentioning earlier. And they’re looking for what could get caught in the crossfire. They’re definitely focused on the strait, but also other potential ways that Iran might send a signal to the US.

Malcolm Moore
There are sort of limited options for ways in which Iran can attack the US outside of the US, of which the most obvious one is a military base in the Middle East.

Saffeya Ahmed
Traders home in on the biggest one the US has there. It’s called Al Udeid base, which is in Qatar and houses 10,000 troops.

Malcolm Moore
So there was a lot of open-source intelligence out there, actually. The oil traders are looking at it in real time. So five days before Iran fires missiles, they can see, and you can see as well, it’s on social media, it’s open-source intelligence, satellite imagery of US military bases in Qatar. And you could see the before and after pictures where the runways had been emptied of all the planes. And so by the time we get to Monday night, oil traders are thinking, look, we already know that base is empty, so this must be a symbolic response.

Saffeya Ahmed
Malcolm, why are they assuming that if an air base gets hit in Iran’s retaliation, that the Strait of Hormuz would automatically be safe?

Malcolm Moore
I mean, I think that it became pretty clear straight away where the missiles were flying to and where they weren’t flying to. And so if you assume that Iran has to respond in some way and it is not firing missiles at the strait, then that’s that, right? Like if they wanted to fire on the Strait of Hormuz, that would have been the moment for them to do so.

Saffeya Ahmed
In an oil trader’s eyes, Iran is striking an empty air base, not ships carrying oil. This is a symbolic response more than anything. The Strait of Hormuz and all of the barrels of oil that flow through it are safe. And so starts a sell-off that shocks a lot of people.

Malcolm Moore
So the official time for the missiles being launched was 7.30pm Doha time. Seven minutes after that, the price of oil starts falling. Within 20 minutes, we’re down 3 per cent. And by the end of that, of trading, a few hours later, we’re down more than 7 per cent. So the price slides to $71. It’s the steepest sell-off in three years. It’s really the speed and the conviction of people selling oil was really surprising to the market, I think.

Saffeya Ahmed
Yeah, and why was it so quick?

Malcolm Moore
It’s a good question. I don’t know the exact answer. I mean, I’m going to say traders were responding to that very narrow question: are the missiles flying at tankers or are they flying somewhere else? OK, if they’re not flying at tankers, that’s a good thing. So that’s the first thing. There’s only a limited amount of information they have to process to make a decision. And then, of course, the decision-making is sped up by, I guess, the technology that we have, the computers making decisions. You know, computers looking across all the signals that there are and being able to crunch the numbers and just immediately say, OK, that’s a sell. And thus you got a very big move in a very short time.

Saffeya Ahmed
Later that same day, on Monday, the US brokers a ceasefire between Iran and Israel.

Malcolm Moore
As soon as it looks like there’s going to be a ceasefire between the two sides, the oil price actually falls to below where it was when it all began, which is remarkable really if you think that actually, again, the whole world’s media is asking questions about, is the ceasefire going to hold? You know, could there still be some risk of further tensions between the two sides? Indeed, there was a risk, right? Because even after the ceasefire was announced by the US president, the Iranians had fired some missiles that landed in Israel, and the Israelis were saying, oh, well, this means that the ceasefire has been violated. So there was a risk going on, but the market was still selling.

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Saffeya Ahmed
OK, so now I want to talk a little bit more about what our listeners can learn from this and how oil traders moved and how we saw the price move during this 12 days of war. So in your opinion, what does this kind of say about how oil traders’ psychology might be changing?

Malcolm Moore
OK, so we have to just go back a little bit. Because if you compare what happened here to what happened when Russia launched its full-scale invasion of Ukraine, you’ve got a very different scenario. Russia invading Ukraine totally reordered the flow of gas and oil in the world. And at that point, prices went sky-high and they remained high for a very long period of time before the world worked out where else it could get oil and gas from.

Since then what we’ve seen is in every sort of geopolitical event we’ve seen a little spike followed by a lot of selling. And that’s because the psychology of the market has changed. Everybody thinks that these events are going to be shortlived. That’s the first thing to say. That they’re not going to escalate into something bigger. Even though, to be honest, you know, what’s been going on in the Middle East has been very serious for a very long period of time, but it’s remarkable how the oil market has shrugged it off. And underlying all of that, the reason for that is that there is enough oil in the world, right? We can see that oil demand is not growing as fast as it was. People have been switching to electric cars very quickly, especially in China, and we’re thinking about peak oil in China. And meanwhile, the US and the Middle East are really pumping a lot of oil. So there’s plenty of it around. And with that sort of supply in the market, the psychology is that people are much more relaxed about geopolitics.

Saffeya Ahmed
And was this the case — the supply in the market, electric cars, everything else you mentioned — was this all the case maybe like a year ago or is the market shifting now?

Malcolm Moore
I think that what’s changed in the last 12 months is the extent to which we’ve moved from a market that people thought was balanced. So before Opec said it was gonna increase its oil supply, the dynamic was that the US was pumping more oil and the Opec countries like Saudi Arabia, they were actually cutting their production. They were holding oil off the market in order to make sure that supply and demand were balanced. And then suddenly the equation changes. And now we have Opec pumping more and the US pumping more. And now people are like, OK, now supply and demand may not be balanced. And there is debate about it. But a lot of people are saying, OK, towards the end of this year, as we move past the peak summer driving season, there’s going to be too much oil on the market and prices are going to plunge.

Saffeya Ahmed
Now what I find really interesting in this saga is how exactly these oil traders came to their conclusions about whether this war would escalate or not. You know, you said looking through social media, at satellite images, to figure out whether this is taking a turn for the worse. As technology continues to develop further, and I’m thinking about things like AI, for example, do you think that traders will capitalise on that? And are they maybe gonna become more privy to reading how these conflicts go?

Malcolm Moore
I definitely think that they are drawing on a lot more information than they’ve previously had access to potentially. The sort of range of signals that are flowing into the market is much wider and the ability to be able to pass those signals is much greater. And it’s not just social media and satellite images and so on. It’s things like, you know, there are trading houses who have invested a lot in trying to be able to predict the weather, right? So they can try and predict when the world’s gonna need more energy or less energy for heating or cooling. And so like, they’ve poured a lot of money into building really, really powerful AI-driven weather prediction models and they’re using those. There’s a lot going on right now that’s going into the market in terms of technology which is giving people the tools to be able to make much more sort of nuanced decisions than beforehand.

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Saffeya Ahmed
Today’s episode was hosted by me, Saffeya Ahmed. It was also produced by me and Katya Kumkova. Our intern is Michaela Sia. Sound design and mixing was done by Sam Giovinco and original music is by Hannis Brown. Topher Forhecz is the FT’s acting co-head of audio. Thanks so much for listening. I’ll see you next week.