Oil, rosé and guessing games

Against the backdrop of conflict in the Middle East, the stock market reacts, oblivious to human misery and individual suffering, governed solely by changes to supply, demand and prices.

The big question for global markets this week has been what is going on with the oil price. Yesterday, Trump’s 2-week reprieve to Iran temporarily eased the oil price. “Based on the fact that there is a chance for substantial negotiations that may or may not take place with Iran in the near future - I will make my decision on whether or not to go within the next two weeks”.

After this statement yesterday, Brent Crude (which always sounds like a lecherous character in a bad 1980s US soap opera to me) fell from above $77 a barrel to $75.60. For context, prices were around $65 in May.

Some traders will make some serious money in the next two weeks with some bets. According to Citi analysts, if supply is disrupted by about 1 million barrels a day, that would put prices at between $75 and $78 a barrel. If supply is disrupted by up to 3 million barrels a day, it could hit $90. ING have gone further and said it could hit $120 a barrel. A key factor in the different opinions is how close the OPEC spare capacity cushion is to the military action. In other words, how much oil will the world be able to get its hands on?

Retail investors can’t buy barrels of oil and store them on the driveway. This is one reason why derivatives were set up – ways we can benefit (or lose) from the movement of asset prices, without having to own and store them. Some people will have bought oil futures this week. This is a contract which gives you the ability to buy something at a fixed price in the future.

Here’s an example and for this, imagine that supermarkets priced more dynamically, in real-time, based on consumer demand. I could have bought a future on a bottle of rosé three weeks ago. To give me the right to buy a bottle of Whispering Angel at £19 on 20th June. As it was quite cold three weeks ago, I probably could have paid 10p to secure this right (that would be the cost of my wine future). Because it’s now scorchio, I would now be able to trot up to Tesco (who in my dynamic world would have put the prices up to £22 because everyone is gagging for a rosé), hand over my ‘future’ voucher, get my bottle for £19 and then sell it to some desperate looking lady with snotty, fighting kids in her car for £22. Instead of which I will just go to Tesco and find that the only bottle left is some nasty dark pink gutrot made by Kylie Minogue, which no-one wants. That’s basically how futures work.

Back to oil. Buying futures (and any derivatives) is complex and hard-core because you can potentially lose a lot of money. Gains and losses are magnified. However, with that said, for anyone who does want to have a dabble, the easiest way is probably to buy an Exchange-Traded product.

The WisdomTree Brent Crude Oil ETF is a way of accessing oil futures via a fund, but this is spicy stuff, so not for the faint-hearted. As I write on Friday morning, it has fallen 2.2% so far today in response to Trump’s comments yesterday, giving hope that the conflict may not escalate as feared. If the rhetoric steps up, this fund will jump. Tracking this performance chart will be the most succinct visual way of following developments in geopolitics over the next fortnight.

I have worked in the investment markets for over 25 years and I can’t think of any one other time when markets were basically dominated by the imprecise and occasionally seemingly random words of one man, and the whole world playing a guessing game of “Will he, won’t he?”, whether about tariffs, global conflicts or squashing Elon Musk.

Back to more local affairs, and yesterday interest rates were held at 4.25%. We all know cuts are coming – and most people forecast at least one more cut before the end of the year. Precisely when is harder to call.

The economy is not looking great. New figures out today show a slump in retail sales in May and corporate insolvencies are up. Trouble is, inflation is persistent and if oil prices shoot up, so will the cost of living. So the Bank of England walks the most difficult of tightropes, wanting to stimulate growth, lower rates and get us all spending and making things. But not fuelling inflation at the same time. If conflict spirals in the Middle East and the oil price shoots up, I would suggest you can forget an interest rate cut in September. The guessing game goes on.

In terms of real-life impact, there are about 1.6 million fixed-rate mortgages expiring this year and deciding what to do is not easy. Most people should be able to get a mortgage rate of between 4% and 5% and there’s not a big gap between the 2 and 5-year rates today. This piece will help cash savers, retirees considering an annuity, or mortgage holders work out what to do next.

On a final note. I don’t write much about annuities. This is basically a product for retirees, swapping a chunk of money today, for a fixed amount every year that you live. I used the Government-backed Money Helper annuity calculator today, had a little play, made myself a touch older, and fibbed about 14 units a week (although, if I can only buy Kylie Minogue rosé this will be true) and found out I could hypothetically trade in £100,000 today in return for about £7,000 a year every year for the rest of my life. Don’t forget that you can have this alongside other pensions and income sources too. With rates at 15-year highs, it’s worth at least considering.

Have a great weekend and enjoy the sunshine!

Holly