Arvind Sanger: Well, you are absolutely right, there is no clear resolution on what is going on. And I would say that there are two possible, maybe three possible ways this could go. One is that you see an escalation where Iran does take action on trying to close the Strait of Hormuz which would invite intervention by the US and the US would come down very hard to make sure that those pass stays open and that could get us involved in a conflict with Iran. Another would be if Iran retaliates including attacking US bases in the Middle East, that too would involve the US in a retaliation.
And the third would be this war between Iran and Israel continues for a few more days. One side is firing missiles, the other side has got its aircraft over Tehran and attacking and at some point the conflict kind of ebbs, some kind of ceasefire is declared. And to me in two out of those three cases whether the US is involved or whether the war just continues on its own, I do not think there is an interest certainly on the side of the US or because of the US interest on the part of Iran to significantly impact oil export infrastructure.
So, either Kharg Island for Iran or Strait of Hormuz if either one of those get attacked, then you could have a spike in oil prices. Our central case remains that there is a 25% probability of something like that happening, but the 75% probability is that this will remain a hot conflict but without directly impacting oil infrastructure. But there is one other thing, shipping companies are going to be avoiding calling in or charging a significant premium because of the risk and uncertainty, so that is going to cause the cost of oil to go up which it already has.
So, even if nothing happens, you could see for a sustained period higher shipping costs, less ships willing to call which will again raise the price of crude, which might cause crude prices to sustain in the 70s, so those are the factors to keep in mind from a crude market standpoint.
Want to understand your view on how much do you think investors have already priced in the possibility of a full-blown conflict in the Middle East because if you see, right now the US futures are trading in the green, this could be on the back of comments that Trump has said there is no involvement, he has also vetoed the killing of Iran’s supreme leader. So, to what extent do you think the market has priced in the impact of whatever is going on?
Arvind Sanger: Well, to the extent that the market thinks that most likely outcome is that this will remain a conflict between Israel and Iran without a significant impact on the oil infrastructure, then the market is looking through this $75 crude and saying, in the next month or two crude prices will settle down, it will be back in the 60s.
And so, the global economy will not be significantly impacted, that is the central case that the market is now coming around to at least for now. Unless something changes, these disruptions, short-term oil price disruptions are buying opportunities. So, in that sense after the correction on Friday global markets are seeing a bit of a breather. But look, wars are unpredictable things and we will have to wait and watch. But I agree with the point that if this is not heating up much more in terms of oil infrastructure, then global equities should start to show signs of some modest recovery from here.
Help us understand that what could be the implications on the global markets and especially the emerging markets because for the week gone by yes, there was a selloff, even you were highlighting that the markets for now are seeing a bit of a breather but in what time do you believe that the markets will digest this fact and move on because this particular week we also have the FOMC meet, the trade talks are going on. So, give us some sense that how do you see the markets moving.
Arvind Sanger: Well, to the extent that oil remains in this mid-70s range with the risk premium but without anything happening, I would say that markets should start focusing on other economic drivers and the Fed meeting is most likely going to be a non-event. We do not expect any action by the Fed. But the trade talks we should hopefully in the next few days and weeks get some clarity there because I mean, the market hates uncertainty, so you have uncertainty on the crude oil side, you have uncertainty on the trade side and yet the pullback on Friday was very modest compared to all the uncertainty.
The markets are still very close to recent highs. So, I think that clarification of uncertainty is essential for the markets to continue to perform and that trade is a big one. I am assuming again that Iran-Israel stays contained to direct attacks on each other and frankly, I would just add not meaningfully so far on Iran’s oil export infrastructure because if Iran’s oil export infrastructure is targeted, if a million barrels or million-and-a-half barrels of Iranian exports are impacted, then that could have significant, it may not have as big an impact as the Strait of Hormuz but if for and whatever reason Israel goes after Iran’s export infrastructure, that could cause another $5-10 or more spike in prices. But barring that I think that markets should be focused on other things and should remain well behaved.
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