Oil Futures React to Geopolitical News and Market Manipulation

Oil futures experienced significant volatility recently, with prices dropping after the president confirmed productive talks with Iran regarding the Strait of Hormuz. However, just three hours later, a new wave of strikes on tankers caused oil prices to rebound and end the week higher. This pattern of price fluctuations following geopolitical announcements has become a recurring theme, happening at least a dozen times.

The Pattern of Volatility

The market has repeatedly seen oil prices fall on news of progress in negotiations, only to rise again when those talks collapse or new conflicts emerge. For instance:

• Late last week: Prices fell after news of talks with Iran, then rose sharply after tanker strikes. This occurred just 15 minutes after financial markets closed.
• A week prior: Prices fell when talks were set up in Doha, then rose six days later when the talks were deemed a "waste of time."
• Another week prior: Prices were pushed down by positive announcements of negotiation progress, then rose when those negotiations fell apart.

This constant back-and-forth has led to a situation where the war has been "resolved and renewed" multiple times even within a short period, highlighting the unpredictable nature of the market.

Market Manipulation Concerns

The frequent and rapid shifts in oil prices, often coinciding with significant trades placed just minutes before major market movements, raise questions about market manipulation. Despite the involvement of massive institutions with highly skilled analysts, these markets repeatedly react to announcements that often prove to be premature or misleading.

Why Oil Futures React to Geopolitical News

There are several reasons why oil futures markets are almost compelled to react to these geopolitical developments, even if they appear to be manipulated or meaningless:

1. Real Market Participants and Physical Settlement

Oil futures markets, such as West Texas Intermediate (WTI) and Brent, are not solely for speculation. They serve a crucial purpose for real businesses like oil producers, shippers, and refiners to lock in future prices. Unlike many purely financial derivatives, oil futures are physically settled. This means that if a contract is held until expiry, the physical oil must be delivered (e.g., to Cushing, Oklahoma for WTI).

• Purpose: This allows producers to secure prices for their output and refiners to guarantee a fixed quantity of input at a fixed price, mitigating price volatility risks for their operations.
• Physical Delivery: While only 2-3% of futures contracts typically result in physical delivery, the possibility of delivery keeps the futures price tethered to reality.
• Impact of Disruptions: Businesses with physical operations are highly exposed to anything that could disrupt their supply chain, such as the closure or reopening of the Strait of Hormuz. They are often "price takers," meaning they accept market prices because their core business is producing, refining, or retailing fossil fuels, not speculating.

A notable example of physical settlement impact was in April 2020, when WTI futures briefly fell to -$37 a barrel. Due to reduced demand during COVID-19 and a lack of storage space in Cushing, traders literally paid people to take their contracts rather than accept physical delivery of oil they couldn't store.

2. Speculators Are Pulling Back

Normally, speculators play a vital role in cushioning the market by accepting the risk of price fluctuations in exchange for potential profits. This creates a "risk transfer mechanism" where actual oil suppliers and consumers can offload price risk.

• Advanced Research: Speculative firms invest heavily in advanced research, including satellite imagery to track oil production and storage levels, to gain a slight edge. Others focus on trading speed to react to news milliseconds before others.
• Impact of Unpredictability: The current geopolitical situation, characterized by unpredictable announcements and potential manipulation, has made it difficult for these sophisticated strategies to work. A desk of PhD analysts' work can be undone by a sudden, politically motivated announcement.
• Exodus of Speculators: Many speculators are now choosing not to play, viewing the market as having unacceptable risk. Net speculative open interest has dropped to near 16-year lows.
• Consequences: This exodus means less market liquidity and a reduced capacity to absorb shocks. With fewer counterparties willing to take the other side of trades, even moderately sized announcements can cause disproportionately large price movements.

3. Political Sensitivity

The conflict has become highly politically sensitive, with multiple regimes staking their reputations on controlling the situation. The price of oil itself has become a political tool, influencing and being influenced by announcements.

Signs of Change: The Market is Starting to Ignore the Noise

Despite the inherent volatility, there's a growing trend of the market slowly starting to ignore the constant stream of headlines.

• Declining Impact: Analysis of major announcements regarding the war's escalation or resolution shows a clear decline in their impact on daily oil price movements.
• Examples:
  • An early war tweet about bombing Iran caused an 8% oil price rise. A similar post in late June about new strikes was ignored, with prices slightly falling.
  • Peace talk announcements in April led to the biggest single-day drop outside the pandemic. Last month, a memorandum of understanding (MOU) with Iran only pushed prices down by 2%.
  • An announcement of a Qatari deal going well actually pushed prices up, reversing typical logic.
• Overall Trend: While real actions (like tanker strikes) can still move prices, the general trend indicates that the market is taking official statements less seriously with each false start.

Why Oil Prices Are Falling Anyway

Despite the ongoing conflict and supply disruptions, oil prices are returning to levels seen before the conflict began. Several factors contribute to this:

1. Decreased Global Consumption

The world is consuming less oil, with an estimated 1 million barrels per day reduction in demand.

• China's Role: China, the world's largest net fossil fuel importer, has seen its crude imports drop to an 8-year low. This is largely due to:
  • EV Adoption: Electric vehicles now account for a significant portion of new car sales in China (62.9% in May, 66.7% in early June), displacing roughly 1 million barrels of oil demand per day in 2025, a figure growing by 600,000 barrels annually.
  • Peak Demand: China's largest refiner, Cenek, reports that gasoline demand peaked in 2023 and diesel demand in 2019.
  • Price Sensitivity: Chinese consumers are more price-sensitive, reacting faster to high oil prices by reducing consumption.
• Producer Response: This trend is prompting OPEC Plus to increase output quotas, adding 2.9 million barrels per day in 2025, with further increases approved for this year. The IEA predicts a surplus of 3.84 million barrels per day this year, potentially reaching 4 million.

2. Speculation About Supply Buildup

There's concern that the oil currently stuck behind the Strait of Hormuz could be released all at once, leading to a massive spike in supply and potentially overwhelming storage capacity.

3. Political Influence on Prices

Oil prices were a significant factor in the last election, and governments are actively trying to bring prices down before voters become more attentive.

• Sanctions Waivers: A 60-day sanctions waiver allowing Iran to sell crude through August was seen as having domestic political advantages.
• Electoral Impact: Research suggests that a 1% increase in crude oil prices 12 months before an election reduces voter intention to reelect the incumbent party by about half a percentage point.

4. Unconventional Economic Proposals: Japan's "Shorting" Idea

Japan floated the idea of using its $1.4 trillion in foreign currency reserves to short oil futures.

• Motivation: Japan aims to stabilize its currency, the yen, which is falling against the US dollar. Since global oil trade is primarily in US dollars, shorting oil prices would theoretically reduce the demand for US dollars in international forex markets, thereby strengthening the yen.
• Rationale: Japan imports over 95% of its crude, and surging oil prices in dollar terms force it to buy massive amounts of dollars, further weakening the yen. Finance Minister Satsuki Katyama blamed speculative crude oil futures for disrupting exchange rates and vowed "thorough action."
• Status: This "crazy, hair-brained scheme" has not yet happened but highlights the extreme measures countries might consider to manage oil price impacts.