Knightley said the recent rally in equities could face a correction as the extent of damage to energy infrastructure in the Gulf is still unclear. “Market euphoria is vulnerable to a reality check,” he said, adding that even if flows resume, supply capacity may not return immediately.
He expects oil prices to stay elevated even if a deal is reached. According to ING estimates, crude could remain in the $90 to $100 per barrel range through the summer, supported by both recovering demand and inventory rebuilding. “That excess demand… is going to keep energy prices elevated,” Knightley said.
These are edited excerpts from the interview.Q: We seem to be on a path to de-escalation. Global markets seem to be celebrating. The Indian markets are also up 9% in the month of April, while the S&P and Nasdaq are hitting new highs. But the warning that’s coming in from global leaders seems to be that we’re underestimating the fallout from the Iran war. So, the Qatar finance minister said what we’re seeing is the tip of the iceberg; a full-fledged impact is coming in one to two months. What is your own assessment that, even if the war comes to an end, what crude prices will be and what the impact will be on global economies?A: That is a really important point. We are a little bit nervous that the market euphoria that we’ve been seeing is vulnerable to a reality check. We still don’t know what the real infrastructure damage is within the Gulf region. That could mean that even if we get back to 100% flows, the infrastructure may not be able to deliver what we had previously been receiving.
And also, of course, we still have to get a deal. We’ve been here before. There’s been optimism before, only for the talks to fail. We’ve got to be very realistic that this is not a foregone conclusion. So, I certainly agree with some of the governments in West Asia that there is a lot of risk still out there.
For the full interview, watch the accompanying video
Even if we do get a deal which starts to unlock the flow through the Strait of Hormuz, we’ve got to remember that many countries have to replenish their energy inventories, in addition to meeting the current level of demand. That excess demand in the coming months is going to keep energy prices elevated.
So that is not great news for corporates. It’s not great news for households either. There’s still going to be quite a lot of economic pain, and we think that’s going to lead to upward pressure on inflation over the next three months, and also downward pressure on economic growth.
Q: What’s the level of crude that you’re anticipating? Because you said that there will be demand that has to be met and stocks have to be replenished by various countries. So that’s going to keep demand and prices elevated.A: Very much so. So even if we get a deal very soon, we are assuming something like we get back to about 40% of the normal flow through the Strait by the end of this month, and then to around 70% gradually through the summer. So, by the second half, we should, in theory, be back to perhaps 80–90% of the typical flow.
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But even in that environment, with the replenishing of inventories across many countries, we would expect crude to be around $90 to $100 a barrel through most of the summer and the third quarter. We may still be in the high $80s towards the very end of this year. So that still is pretty painful.
Q: If oil stays high in the $90 per barrel range, could the outcomes for US equity markets and markets in Asia be very different?A: That’s spot on. I think there is a big disconnect. We’ve got to remember the US is energy self-sufficient. It produces more energy than it consumes and is a net exporter. The US is far more insulated from the economic fallout than countries in Asia or Europe.
There is possibly an investment boom coming in the US oil industry as Asian and European countries look to diversify purchases away from the Gulf. So, the US benefits from that.
Also, the supply shock for America is much narrower than it is for Asia and Europe. In the US, it’s mainly motor fuel and aviation fuel. Natural gas prices have actually fallen, so electricity bills may decline.
Whereas in Europe and Asia, natural gas prices have been rising, and there is a real risk that electricity bills will go up. So, there’s a greater squeeze for households and consumers in Europe and Asia than in the US.
Q: Which economies are at the most risk? Have you cut gross domestic product (GDP) forecasts?A: We’ve even cut growth in the US as well. The US is insulated, but not immune. Gasoline prices at $4.50 a gallon are painful, and households are already under pressure. Real disposable incomes are not rising, which is a headwind for growth.
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If we look at Europe and Asia, the impact is broad-based. Countries that are heavily dependent on energy imports will face a more prolonged adjustment.
Look at Japan, Korea, Taiwan—these are heavy energy importers. In Europe, too, the impact is widespread. So, we are more cautious on the growth outlook across Europe and Asia relative to the United States.
Q: Do you want to tell us India’s forecast? Do you have one?A: We don’t actually cover India right now. We’re still waiting for that. But I think in general, we will be looking for the Indian economy to be impacted as well, just given the natural energy import usage as well.
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