Citadel: Energy markets underestimated the impact of the crisis triggered by the war in Iran

The ongoing war in the Persian Gulf region is having a major impact on energy commodity prices, especially oil and natural gas. However, a senior executive at multinational company Citadel says markets underestimated the price volatility triggered by the conflict. According to him, the market did a “good enough job” before the conflict broke out, but volatility subsequently surged by hundreds of percent.

The ongoing war in Iran has caused the largest disruption to energy commodity supplies on global markets in history. The closure of the Strait of Hormuz cut off around one-fifth of the world’s oil and liquefied natural gas (LNG) supplies. The disruption had an immediate impact on prices for these commodities on global markets, with the strongest price volatility since Russia’s invasion of Ukraine seen in the first weeks of the conflict.

Sebastian Barrack, Citadel’s head of commodities, said at a summit in Lausanne, Switzerland, earlier this week that commodity markets entered the US-Iran conflict with a fairly high level of escalation risk already priced in, but significantly underestimated the resulting volatility shock, according to Argus. Citadel is a US multinational company active in hedge funds and financial services.

Barrack said markets did a good enough job of pricing in possible developments before the war broke out, but failed to adequately price in the subsequent volatility. According to Argus, volatility in oil and gas prices rose by as much as 300% over the first few weeks.

Barrack also recalled market developments at the start of the war in Ukraine, which Russia launched on a full scale in February 2022. At the time, gas market volatility rose by around 500%, he said, while margin requirements increased roughly fifteenfold. This had a major impact on trading, with many market participants forced to close their positions because they could no longer finance them.

Forward markets see hope for a quick resolution to the conflict

Barrack also rejected claims that forward markets had become disconnected from physical fundamentals. Instead, he argued, the price gap between physical and financial contracts reflected the market’s differing responses to different issues. While physical contracts, particularly in Asia, reacted with sharp increases, forward contracts began earlier to reflect expectations that the disruption to oil and gas supplies would soon be resolved and that supplies would return to the global market.

He also highlighted the constant flow of information through social media and how traders acted on it. Statements by US President Donald Trump, as well as those of other politicians, have had and continue to have a major impact on market prices. However, he said, this flow of information does not diminish the importance of detailed analysis of physical commodity flows and how individual markets respond to supply disruptions.