"May you live in interesting times" aptly summarises the start of 2026 for energy. Crude oil markets were roiled by news of direct US intervention in Venezuela and then by possible US military action in Iran. Investors responded by buying oil and related equities, both of which have outperformed broader equity markets year to date.
However, if we look at the fundamental backdrop for both commodities, longer-term prospects for oil are less positive and less negative for natural gas than immediate price action indicates.
Oil markets initially rallied on both developments as the historical playbook calls for higher prices whenever geopolitical tensions escalate, particularly in the Middle East. Yet if we examine the actual rationale, is this really the case? The consensus fear is that a US strike will trigger retaliation by Iran, most likely by choking off the Strait of Hormuz, a narrow outlet through which approximately 20% of global oil flows. How likely is Iran to close the strait, and for how long, if their goal is to retaliate against the US?
US oil imports
First, it is important to note that the US gets close to 70% of its imported oil from Canada and Mexico, whilst Middle Eastern oil accounts for only 7% to 10% of imports. On the other hand, 90% of Iranian oil exports flow through the strait and 80% to 90% of that oil is sold to China.
Closing the Strait of Hormuz would damage the Iranian economy far more than it would disrupt US oil consumption, potentially antagonising a historical ally. Furthermore, there are ample buffers in the physical markets. China is estimated to currently hold record levels of crude inventory, and OPEC has idled production that can come quickly into the market. Any physical tightness will likely be temporary and can be quickly met with intervention.
The longer-term picture for crude also fails to improve with recent Iran and Venezuela developments. Whilst the actual reserves and state of infrastructure in both countries are debatable, we know they possess significant reserves. If history serves as a guide, regime changes cause disruption, but the long-term outcome is that introducing Western financial, technological and human capital results in higher eventual crude production, with Iraq serving as precedent (see Figure 1).
Figure 1. Iraq oil production
Source: Bloomberg, as at 15 January 2026.
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Natural gas
Switching to natural gas, we see a different dynamic. After an initial price run in November due to cold weather, Henry Hub natural gas prices have since plummeted as December and January proved warmer than normal. Yet behind this weather-driven volatility, a structural change is happening in the global natural gas market.
Natural gas has historically been a regional market with massive priced differentials between regions due to a lack of intercontinental pipelines. The only method of transporting gas abroad was via liquified natural gas, an expensive proposition. However, as LNG infrastructure has been developed and built, stranded North American gas is finding a home overseas in markets where prices are often significantly higher than domestic prices. This marks a monumental structural shift, creating a "British Thermal Unit (BTU) parity" event where global arbitrage will gradually push regional prices to converge, adjusted for physical costs such as transportation.
Figure 2. US LNG exports
Source: Bloomberg, as at 15 January 2026.
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Despite overtaking coal as the main form of power generation over the past 20 years, North American natural gas has experienced numerous boom-bust cycles as the molecules were subjected to short-term induced volatility like weather and pipeline constraints. However, the pressure relief valve of more stable Asian and European end markets should eventually lower extreme volatility and offer more attractive prices.
Volatility and news will continue to move oil and gas prices in the short term, but it is important to keep focused on longer-term fundamentals. In this instance, the commodity futures market has remained more rational.
Whilst commodity curves have little ability to forecast actual future prices, they are an important indicator of how current market participants view the future. In the crude market, where spot prices initially rose on Iran and Venezuela news, the back end of the curve has continued to be pressured lower. In the case of natural gas, whilst the front end of the curve has plummeted due to warmer weather, the back end has remained relatively unchanged.
All data sourced from Bloomberg unless otherwise stated. Past performance is not indicative of future results.
Author: Albert Chu, a Natural Resources Portfolio Manager at Man Group.
Trump's MBS Fed bypass may actually risk inflating home prices
US President Donald Trump’s plan to instruct agencies Fannie Mae and Freddie Mac to buy US$200 billion in mortgage bonds to lower rates for American homebuyers may only deliver modest rate relief and could slightly worsen the housing crisis that he is trying to solve.
At the current size of US$200 billion, the programme is a fraction of what the Federal Reserve (Fed) deployed during past crises. When the Fed bought approximately US$1.25 trillion in mortgage-backed securities (MBS) between 2008 and 2010 as part of its Large-Scale Asset Purchase (LSAP) plan, mortgage rates fell 20 to 30 basis points (bps) on the announcement alone, and eventually dropped more than 100 bps. Another round of US$1 trillion in MBS purchases lowered rates by 15 to 30bps and finally the US$2 trillion in housing bonds the Fed bought during the pandemic enabled it to keep already-low rates anchored.
Limited impact
This track record suggests that the planned US$200 billion in MBS purchases by Fannie Mae and Freddie Mac will have a limited impact on mortgage rates. However, other factors are also likely to affect mortgage rates – i.e., how quickly the bonds are purchased.
By routing the intervention through government-sponsored enterprises rather than the central bank, Trump has found a workaround for a Fed that refuses to cut rates as aggressively as he would like. The reality is that cutting the fed funds rate would likely have very little impact on mortgage rates, which are affected far more by the 10-year US Treasury yield. In turn, the 10-year US Treasury yield can be driven by a number of factors, including demand or lack of demand for long-dated Treasuries (bond vigilantes can play a role in this, driving up yields on fiscal sustainability concerns).
That is why, when it wanted to bring down rates on the long end and in particular lower mortgage rates, the Fed bought long-dated Treasuries and MBS through its LSAPs. Whilst the Fed is not the entity buying the bonds, this is essentially qualitative easing, applying quantitative easing principles to assets with greater risk than Treasuries.
Large-scale asset purchases (both quantitative and qualitative easing) are the tools central banks have adopted in recent years to stimulate the economy when cutting short-term rates is not believed to be adequate. Large-scale asset purchases inject liquidity and lower long-term interest rates.
Since Trump's MBS announcement, mortgage rates have already dropped about 20 bps despite no purchases being made. Based on the history of the Fed's purchases, the actual buying is likely to deliver an additional 10 to 30 bps, given the relatively small scale.
Rates down, prices up
It may, however, have the unintended consequence of pushing up house prices. Recent research from Brookings shows that whilst Fed MBS purchases between 2020 and 2022 successfully lowered mortgage rates, they simultaneously drove home prices higher by stimulating demand. Cheaper mortgages boost buying power, but in a supply-constrained market, that extra demand flows into higher prices. In other words, lower borrowing costs improved near-term affordability, but the resulting rise in house prices exacerbated affordability issues.
In our view, a much bigger issue for markets is Fed independence. The Justice Department served the Fed with grand jury subpoenas, threatening criminal indictment against Chair Jerome Powell.
Ironically, the subpoena revelation has likely resulted in less easing in the near term, as the Fed demonstrates it will not bow to political pressure. In addition, US Senators Thom Tillis and Lisa Murkowski have made it clear they will not support any Fed nominations until this legal situation is resolved, which could slow down the White House's efforts to put in place FOMC members who are more dovish.
All data sourced from Bloomberg unless otherwise stated. Past performance is not indicative of future results.
Author: Kristina Hooper, Chief Markets Strategist at Man Group.
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