Actually you would be amazed I think to know how oil is traded professionally. Many professional forecasts, be it from hfs or banks, are stained by lack of statistical/common sense. I think forecasters of your caliber add a tons of value.
The main question I think so far is still that the price has not reacted as hard as it should have based on elasticity etc, which indeed is probably about the administration, US and Japanese. But most traders strongly believe, out of experience, that you can't move prices like that forever ; at some point something must give.
As I understood it, the median forecast for the max price of 2026 on ~ the prompt month is that you assume it to be about 40% up from there. In the event of a draw of the supply for still 2 whole months, I can't see how it would stay there. I am not a pro on oil but the classic kind of s&d demand is to compare inventory vs draws and to give this a fair value on the oil price (I know you are looking at the max but it should not change too much I think).
The relation between inventory to demand ratio and price is convex (this is observed across all commodities). Every further draws or reduction in supply has a much stronger impact than the last one. Assuming SoH is still closed by June it's hard to see how the price could not rise much strongly.
Now I suppose you are not forecasting the price using similar methodologies to the bank, which is why I'm asking you these questions. I assumed you extensively use polymarket odds etc for some events and model from there.
In my case, I really have trouble understanding why the price is so low, even assuming governments are shorting it. This is not congruent with my experience in other commodities where smaller shortages would create much stronger price change. I think the market is still planning for a prompt end to SoH situation which I think would be less than 40% but that's what polymarket is saying so I use their numbers.
I see, yes, sorry for my reading comprehension, I realize now that Polymarket is at 60% of no return to normality, not the other way around.
Our methodology in this case is poor; rather than having a deep model of the price elasticity of oil, in this case we are querying forecasters about their subjective sense of what these prices will be. This is better than having a model that proves brittle to things like the UAE leaving OPEC, Trump unsanctioning Russian oil, or blinking, and has the advantage that it can consider the joint movement of oil prices and the administration response. But these guesses are very informal, and are going to be much worse than if you have a confident guess on whether the strait will remain closed and a better model of how price will respond. If you are trading oil professionally and are doing this succesfully it probably doesn't make sense to defer to us more than maginally.
Thanks for your comment, hopefully it'll have been of use to other readers as well.
I completely agree. Looking at futures markets through the end of the year it is clear that the market is still pricing in a full and rapid recovery any day now.
I suspect your team is expecting similar price action in response to future events. The proper expectation is that pricing is in an unstable equilibrium that is becoming more unstable every day.
Eventually, in the absence of a deal, the futures curve will have to correct and it will be extremely violent. It could be an escalation from one side or the other, or it could be physical reality which will begin to kick in in the second half of June. Or it could be one big trader changing their mind.
Currently your numbers are saying that every forecaster predicts a more than 50% chance of a firm deal agreed on by both parties that reopens the strait before the end of June with almost no further brinksmanship. I don’t believe that viewpoint is coherent with your actual views, and I’d like to know if I’m missing something or misunderstanding
Right now you can make $30 a barrel just by selling physical oil now and agreeing to get the same amount delivered back to you in August. That trade is held up by a combination of direct government intervention and belief in the necessity of a deal any day now. It will not survive through June. When the market finally snaps, prices will have to rise until demand is destroyed, and that number is certainly over $200
Actually you would be amazed I think to know how oil is traded professionally. Many professional forecasts, be it from hfs or banks, are stained by lack of statistical/common sense. I think forecasters of your caliber add a tons of value.
The main question I think so far is still that the price has not reacted as hard as it should have based on elasticity etc, which indeed is probably about the administration, US and Japanese. But most traders strongly believe, out of experience, that you can't move prices like that forever ; at some point something must give.
Thanks for your answer !
Are there details for the oil price forecast ? I have trouble squaring a median price like that with Polymarket return to normalcy for SOH by June at 40% (https://polymarket.com/event/strait-of-hormuz-traffic-returns-to-normal-by-end-of-june)
How is a 40% forecast incongruent with a forecast about the 50%-ile price?????
As I understood it, the median forecast for the max price of 2026 on ~ the prompt month is that you assume it to be about 40% up from there. In the event of a draw of the supply for still 2 whole months, I can't see how it would stay there. I am not a pro on oil but the classic kind of s&d demand is to compare inventory vs draws and to give this a fair value on the oil price (I know you are looking at the max but it should not change too much I think).
The relation between inventory to demand ratio and price is convex (this is observed across all commodities). Every further draws or reduction in supply has a much stronger impact than the last one. Assuming SoH is still closed by June it's hard to see how the price could not rise much strongly.
Now I suppose you are not forecasting the price using similar methodologies to the bank, which is why I'm asking you these questions. I assumed you extensively use polymarket odds etc for some events and model from there.
In my case, I really have trouble understanding why the price is so low, even assuming governments are shorting it. This is not congruent with my experience in other commodities where smaller shortages would create much stronger price change. I think the market is still planning for a prompt end to SoH situation which I think would be less than 40% but that's what polymarket is saying so I use their numbers.
Thanks for reading !
I see, yes, sorry for my reading comprehension, I realize now that Polymarket is at 60% of no return to normality, not the other way around.
Our methodology in this case is poor; rather than having a deep model of the price elasticity of oil, in this case we are querying forecasters about their subjective sense of what these prices will be. This is better than having a model that proves brittle to things like the UAE leaving OPEC, Trump unsanctioning Russian oil, or blinking, and has the advantage that it can consider the joint movement of oil prices and the administration response. But these guesses are very informal, and are going to be much worse than if you have a confident guess on whether the strait will remain closed and a better model of how price will respond. If you are trading oil professionally and are doing this succesfully it probably doesn't make sense to defer to us more than maginally.
Thanks for your comment, hopefully it'll have been of use to other readers as well.
I completely agree. Looking at futures markets through the end of the year it is clear that the market is still pricing in a full and rapid recovery any day now.
I suspect your team is expecting similar price action in response to future events. The proper expectation is that pricing is in an unstable equilibrium that is becoming more unstable every day.
Eventually, in the absence of a deal, the futures curve will have to correct and it will be extremely violent. It could be an escalation from one side or the other, or it could be physical reality which will begin to kick in in the second half of June. Or it could be one big trader changing their mind.
Currently your numbers are saying that every forecaster predicts a more than 50% chance of a firm deal agreed on by both parties that reopens the strait before the end of June with almost no further brinksmanship. I don’t believe that viewpoint is coherent with your actual views, and I’d like to know if I’m missing something or misunderstanding
Right now you can make $30 a barrel just by selling physical oil now and agreeing to get the same amount delivered back to you in August. That trade is held up by a combination of direct government intervention and belief in the necessity of a deal any day now. It will not survive through June. When the market finally snaps, prices will have to rise until demand is destroyed, and that number is certainly over $200
> the market is still pricing in a full and rapid recovery any day now.
> I suspect your team is expecting similar
Yep.
See my other comment on how seriously you should change our views.
> more than 50% chance of a firm deal agreed on by both parties that reopens the strait before the end of June with almost no further brinksmanship
This is kind of tricky, you could have a continuous range of outcomes.
What probability does Sentinel put on US troops on the ground in Iran before end of 2026?
Polymarket at 33% doesn't seem unreasonable https://polymarket.com/event/will-the-us-invade-iran-before-2027