Energy price squeeze

At Tricio we focus on economic cycles, market structures and investor behaviour in order to help clients navigate markets with a medium to long-term investment outlook. We also look at charts in order to gauge sentiment and potential turning points. The US attack on Iran last week was covered in our weekly and monthly research publications and in a recent podcast. In our podcast John Calverley, Tricio’s Chief Economist, discussed how energy price rises can impact economies and central bank rate decisions. A lot depends on the duration of the price rises and how they are transmitted through the economy. Higher wages and growth would be inflationary, pullbacks in consumer spending would lower growth expectations and could limit price rises, for example. Oil price moves are shifting on news and speculation over key transit routes being shut or shunned and the risks of infrastructure damage, which could take years to recover from depending on the damage.

For long-term investors (long-term ICE Brent chart below) the real impact of higher energy prices may take time. Our collective experience since Gulf War I kicked off in August 1990 as Iraq invaded Kuwait (Operation Desert Shield, which turned into Operation Desert Storm in January 1991 when the US-led coalition started to liberate Kuwait) is that the big rises in oil prices don’t last long. GW1 is a small blip on the weekly chart below. The big rise in prices after the late 1990’s lows was in part GW2, but mostly China’s seemingly insatiable demand for energy as they became the global manufacturing centre after their WTO entry.

It is hard to believe now but as prices rose there were many intelligent oil market experts talking about ‘peak oil’ and how prices would go higher forever. We tend to think that ‘high prices cure high prices’ and either demand falls off or, more likely, technology and substitution effects help out. Canadian and US changes to oil extraction methods (shale, oil sands, fracking etc.) and cheaper ways of finding and drilling for oil have seen the US become a net-exporter now. So, does the risk of higher oil prices matter?

Well, at some point consumers baulk at higher prices. While the US may be less affected by oil prices than they were in the 1970’s, the price at the pump still matters for consumer sentiment and spending. If ICE Brent (global benchmark) prices continue to break higher out of the range that has been holding since early 2025, they will drag WTI (US benchmark) along for the ride to some extent.

Does this matter? The ‘yo-yo’ changes seen over the last 25 years would tend to make one think that at some stage, prices will drop. True, but between now and then other markets and key economies could be affected. The shorter-term Brent chart below shows very simple extension targets. $180/bbl. anyone? We have been favouring a break down to $60/bbl. for $45/bbl. since oil pushed above $120/bbl. after Russia invaded Ukraine. We were very right and very happy last year when $60/bbl. finally printed. Now? Ay caramba, as Bart Simpson would exclaim.

Oil price bears will be watching this break higher and thinking that the $95/$100 bbl. area should hold, and then oil prices will drop to $60/bbl. again. The risk is that the $100/bbl. area gives way and then the market will be looking for $120/$125 per bbl. for $140/bbl. approaches. If the latter gives way, then $180/bbl. risk would be open.

Again, on a long-term view unless oil supplies (infrastructure, wells etc.) are disrupted in a way that the world has never seen before, then high prices should cure high prices. Demand may come down (economic slowdown), new supplies may come online etc. Right now though, less than a week into this war, the oil market is starting to chip away at complacency.

For Europe? As John points out in our podcast, gas prices matter a lot more than oil does for the broader economy. The TTF front-month futures chart below shows that the Russian invasion of Ukraine sent prices through the roof. Since then, prices have settled into a range. The risk is that supplies are further disrupted. While the start of summer in the Northern Hemisphere just around the corner may ease some demand, the risk of higher prices in the short-term bears watching.

Bottom line? Hope for the best, plan for the worst. Brent prices haven’t spiked higher in a big way yet, but they are not coming back down in a big way yet either. Keep an eye on upside risk, and remember that sentiment matters, people who have to pay more for fuel may not be able to pay a lot for other goods etc.

For further information on our research insights and our ‘Ask a Buddy’ CIO service please contact us at info@tricio-advisors.com 

Gerry Celaya

Chief Strategist