How oil traders called the Middle East war

0:00In 1898, John Nuveen had a vision to underwrite municipal bonds that would propel American infrastructure into the 20th century. More than 125 years later, that vision lives on. Today, Nuveen has grown into a leading global asset manager with expertise spanning public and private markets, still investing with a future in mind. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible.

0:33The FT's energy editor Malcolm Moore tells me that there is an age-old rule in the global oil market. When war breaks out of the Middle East, oil prices spike. 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 U.S. air base in Qatar last Monday, it was a major escalation in the recent conflict between Iran, the U.S., and Israel. And the market didn't spike.

1:08Malcolm 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.

1:21Oil traders bet that this war would be short-lived. 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 Safiya Ahmed from the Financial Times, in for Michaela Tendera. And this is Behind the Money.

2:00In the middle of June, hostilities break out between Israel and Iran. Israel just carried out a surprise attack against Iran. Iran retaliates, hitting populated centers in Israel. In trading fire over the next several days, over 600 Iranians die, and nearly 5 ,000 are injured by Israeli airstrikes. Another morning of explosions across Iran. 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.

2:49Now, as tensions heighten, there's one part of the global economy that is watching this conflict very closely. 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.

3:05Malcolm Moore: They have to make decisions on whether they're going to buy or they're going to sell. 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? 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.

3:39Malcolm Moore: 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. And what kind of tools are they using to assess that risk? They're looking across all the sorts of sources of information they can possibly get their hands on, from open source intelligence to social media to the sort of algorithms that their computers are using to predict price movements to sort of financial information on the way that markets tend to move. So now this recent conflict starts with Israel attacking Iran on June 13th.

4:22You are talking to several oil traders at this point. What are they doing or looking at in the lead up to this? 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 to be like last October when the two sides traded missiles, but ultimately nothing else happened or is it going to be more serious?

4:48Malcolm Moore: And the thing they care about the most is something called the Strait of Hormuz. Remember that name, the Strait of Hormuz. It's at the top of oil traders' minds throughout this 12 days of war. Now this is a choke point at the end of the Persian Gulf and it's a really narrow strait. It's only 33 kilometers 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.

5:32Malcolm Moore: And if that happens, then suddenly the world has a real oil supply problem. With a quarter of the world's oil supply potentially at risk, the benchmark global price for oil shifts a bit. It had been hovering around$60-ish a barrel before any missiles were fired. When fighting started, the oil price jumps from the sort of mid-60s to the mid-70s. Even though it is a bit of a spike, Malcolm tells me it's a significantly calmer reaction than is typical for this market. 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.

6:19Malcolm, 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? 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. 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.

7:01Malcolm Moore: That's when OPEC, which is the group of countries, the group of oil producing countries that kind of get together and decide how much oil to produce, they suddenly said, oh, actually, we're going to start pumping a whole lot more oil. That move was unexpected, but it's because OPEC in part thinks that there will be higher oil demand this year. And on top of OPEC's boosted production, the U.S. 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. The oil traders were really looking at the conflict through a very narrow focus.

7:45And 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?

8:01Now, up until the Sunday before last, June 22nd, this conflict is only between Iran and Israel. But then...

8:14We have breaking news now out of the Middle East. President Trump announced the U.S. has attacked three nuclear sites in Iran. Major U.S. strikes on Iran now directly involved in this conflict. The U.S. has dropped bombs and cruise missiles on three Iranian nuclear sites. The president speaking just... 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 III. The mood is very doom and gloom. But what are oil traders thinking at this point? Are they more worried now? So that's a really interesting question.

8:49Malcolm Moore: because on that day when the U.S. 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 going to respond? I traded messages with an oil market guy and he said, nope, I think this is going to de-escalate things. And I said, seriously? Yeah, I was going to say that I feel like people here, the U.S. getting involved, it sounds like it's becoming a bigger war than a smaller one. 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?

9:30Malcolm Moore: 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 going to 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.

9:55The future of fixed income investing will continue to blur the lines between public and private markets. Nuveen's credit platform was built to navigate this shifting landscape, channeling capital toward the businesses, infrastructure and energy solutions that are shaping tomorrow's economy, all while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible. So in seeming contrast to everybody else watching this war play out, oil traders are betting that the U.S.

10:33getting 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 U.S.'s attack. So on that Monday, everyone was waiting for Iran's response.

10:48Malcolm Moore: And no one knows what Iran is going to do. Rumbling on in the background, the Iranians have been saying, we're going to close the Strait of Hormuz, we're going to target the ships in the Strait of Hormuz, but nobody actually knows what they're going to do. 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 U.S. There are sort of limited options for ways in which Iran can attack the U.S.

11:26Malcolm Moore: outside of the U.S., of which the most obvious one is a military base in the Middle East. Traders home in on the biggest one the U.S. has there. It's called Al-Udayd Base, which is in Qatar and houses 10 ,000 troops. 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.

12:04And 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.

12:18Malcolm, why are they assuming that if an air base gets hit in Iran's retaliation, that the Strait of Hormuz would automatically be safe? I mean, I think that it became pretty clear straight away where the missiles were flying to and where they weren't flying to.

12:36Malcolm Moore: 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. In an oil trader's eyes, Iran is striking an empty airbase, 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. So the official time for the missiles being launched was 7.30 p.m. Doha time. Seven minutes after that, the price of oil starts falling.

13:23Within 20 minutes, we're down 3%. And by the end of that of trading a few hours later, we're down more than 7%. 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. Yeah. And why was it so quick? 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?

14:01Malcolm Moore: Okay, 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've got a very big move in a very short time. Later that same day, on Monday, the U.S. brokers a ceasefire between Iran and Israel. 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 u.s president the iranians had fired some missiles that landed in israel and 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.

15:21Okay, 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 trader psychology might be changing? Okay, 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.

16:11Since 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 short-lived, that's the first thing to say,

16:26Malcolm Moore: that they're not going to escalate into something bigger. Even though, to be honest, 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.

17:03And with that sort of supply in the market, the psychology is that people are much more relaxed about geopolitics. 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? 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 going to 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.

17:42They 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, okay, now supply and demand may not be balanced. And there is debate about it, but a lot of people are saying, okay, 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. 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.

18:20You 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 capitalize on that? And are they maybe going to become more privy to reading how these conflicts go? 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.

18:57And it's not just social media and satellite images and so on. It's things like, you know, there are trading houses

19:05Malcolm Moore: 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 going to need more energy or less energy for heating or cooling. And so 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 nuanced decisions than beforehand.

19:41Today's episode was hosted by me, Safiya Ahmed. It was also produced by me and Katya Kumkova. Our intern is Michaela Sia. Sound design and mixing was done by Sam Giavinko, and original music is by Hannes Brown. Topher Forges is the FT's acting co-head of audio. Thanks so much for listening. I'll see you next week.

20:12The future of fixed income investing will continue to blur the lines between public and private markets. Nuveen's credit platform was built to navigate this shifting landscape, channeling capital toward the businesses, infrastructure and energy solutions that are shaping tomorrow's economy, all while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible.