[Scenario Assumptions]
The main change this week is the passing of the U.S. midterm elections. With the Democratic Party securing a majority in both houses, market expectations for an end to the war with Iran have risen, causing crude oil prices to drop significantly. reuters.com
While uncertainty surrounding the election results has receded, ambiguity remains regarding future policies, the situation in the Middle East, and the actual recovery of supply. In the short term, we anticipate both downward pressure from ceasefire expectations and supply concerns due to transportation disruptions.
① Downward pressure from ceasefire expectations and the resurgence of geopolitical risks
Expectations for changes in policy toward Iran following the U.S. midterm election results
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Expectations for a ceasefire and progress in negotiations
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Reduction in the geopolitical risk premium priced into crude oil prices
Meanwhile, we continue to anticipate the following developments as well:
Hardline statements or military actions by the U.S. or Iran
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Resurgence and prolongation of geopolitical risks
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Increased price volatility and instability in directionality
If expectations for peace negotiations rise, prices are likely to fall. Conversely, if attacks on tankers and transportation disruptions continue, supply concerns could reignite.
If supply shortages are compensated for by strategic reserve releases from major consuming nations, market turmoil could potentially ease. However, we distinguish between temporary supply supplementation and the recovery of production and transportation capacity.
Additionally, we believe that if future U.S. policies change the outlook for the economy and energy demand, that will also influence price formation.
Regarding natural gas, we are entering a period where heating demand begins in earnest. While continued temperatures higher than average would act as a factor to suppress demand, we also anticipate a short-term price surge due to a shift toward cold wave forecasts.
② Progress in negotiations involving the U.S.-Iran and Ukraine-Russia
Peace talks between the U.S. and Iran have stalled, and military exchanges have been observed. Although market expectations for a ceasefire have risen following the midterm election results, it remains necessary to observe whether negotiations will actually progress.
There is a possibility that the change in congressional composition could influence the administration’s policy decisions. However, the President has not changed, and even if the emphasis on diplomacy increases, it is not yet determined whether this will lead to progress in negotiations or a hardline stance.
Transportation costs also remain at high levels, making it difficult to judge that supply normalization has progressed simply because prices have fallen.
On a time horizon of several months, the slowdown in demand due to the rise in fuel prices to date may gradually be reflected in prices.
The summer driving season in the Northern Hemisphere has ended, and seasonal upward pressure on gasoline demand has weakened. On the other hand, supply constraints and high transportation costs remain as factors supporting crude oil and petroleum product prices.
Natural gas is in a period where winter heating demand is being priced in, and we are focusing on the fact that supply and demand outlooks are prone to fluctuations based on changes in temperature forecasts.
Progress in ceasefire negotiations between Ukraine and Russia could also be a factor in pushing down energy prices. However, since the impact varies depending on the extent to which sanctions and export/transportation conditions change, we currently view this as a secondary scenario.
① Reorganization of supply order in the Middle East and other regions
Reorganization of procurement sources and transportation routes by energy-importing nations
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Changes in the global supply structure
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Impact on energy procurement prices through changes in transportation distances and procurement costs
While diversifying procurement sources increases supply stability, it acts as a factor supporting procurement prices when accompanied by longer transportation distances and additional investment.
We believe the following movements also have the potential to change the medium- to long-term supply structure.
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Changes in the cooperative framework of OPEC member countries and partner countries
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Increased production in regions with low dependence on the Strait of Hormuz
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Diversification of procurement sources and transportation routes by importing nations
② Recovery of crude oil production and transportation capacity
We believe that supply will gradually recover through increased production by non-OPEC oil-producing countries and restoration in affected regions.
However, depending on the situation of damage and disruptions, the following political and practical challenges remain.
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Ensuring the safety of shipping lanes, such as mine clearance as needed
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Restoration of production facilities and port/transportation infrastructure
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Establishment of agreements and security frameworks regarding transportation
Even if supply volumes recover, if transportation costs remain high, upward pressure on energy procurement costs may persist.
As a base scenario, we continue to assume that supply normalization will proceed in stages and that a full-scale recovery will take time until 2027 or later. However, this is a hypothesis at the current point in time, and the timing of recovery may shift depending on the effectiveness of a ceasefire and the securing of transportation routes.
[Structure]
Fluctuations in crude oil and gasoline inventories were both relatively small.
Meanwhile, following the results of the U.S. midterm elections, significant price movements were observed across multiple markets. Equities rose, while the dollar and crude oil fell. There were instances where U.S. Treasuries were bought, requiring a separate assessment of price and yield movements. MarketScreener
Crude oil, in particular, saw a sharp decline, and it appears that political sentiment and ceasefire expectations were more influential in this price action than weekly inventory changes.
Crude oil and gasoline prices fell significantly over the past week.
According to CFTC data as of October 27, there was a discrepancy in crude oil between the net positions of futures/options combined and futures only. For gasoline, long positions held by the speculative investors we monitor were notable.
However, these were pre-election positions and do not reflect movements following this sudden change.
While tanker freight indices for both crude oil and petroleum product transport remain at high levels exceeding the spring peak, they have been on a downward trend since October.
Although both prices and freight rates are falling, the level of freight rates itself remains high. I will continue to monitor the extent to which the supply environment is improving.
The U.S. midterm elections have passed, and the Democratic Party has secured a majority in both the House and the Senate. The market has significantly adjusted crude oil prices and other assets in response to this change.
However, there is a time lag before the new congressional composition is reflected in actual policy. Since the new Congress with a Democratic majority will begin in January 2027, current price movements include expectations that precede policy implementation. MarketScreener
Furthermore, the President has not changed, and Middle Eastern affairs and global energy supply are not matters that can be determined by the U.S. alone.
Moving forward, I will continue my observations focusing on the following points.
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Whether ceasefire expectations lead to actual negotiations or agreements
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Whether improvements in physical supply, such as vessel transit and export volumes, are observed
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Whether the decline in tanker freight rates continues
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How U.S. policy changes will ripple through the economy and energy demand
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How speculative positions change after the election
I intend to distinguish between the confirmation of election results, expectations priced into the market, and actual supply recovery.
*This article is a personal record summarizing my own market observations and learning. It is not intended as investment advice.
