War is a tragedy and the erupted war in Israel and Gaza is horrendously heart-breaking. While the economic aftershocks of open conflict between Israel and Palestine are already being felt, historical data shows that the markets generally handle these kinds of events reasonably well. It also depends on the severity and duration of the conflict.
A broader conflict involving Israel and Iran could significantly impact crude markets globally. Escalation with Iran is perhaps the biggest risk in my mind now which would likely directly draw the US into the conflict.
We are so lucky we can discuss what it means for our money rather than for our lives or our kids. Here is the latest commentary from one of the energy trading partners on my radar that landed on my desk:
On the oil-centric front, here is how we are approaching the oil market through this lens. This is a bullish event, but it won’t be because of the loss of oil supply. It will be a bullish event through the combination of macro sentiment, an increase in the geopolitical risk premium, and the fact no trader wants to be fired or explain a loss that involves the question, “Why did you hold short positions through a war in the Middle East?”. There will be short covering, regardless of potential supply disruptions.
We were short oil on Friday. When the oil market opened Sunday night, our stops were triggered, and we exited short positions with Brent June 24 oil up USD1.40 on the day. We continue to be short heating oil cracks, helping to ease the small loss of today. We will be flat on the month after today, previously up 0.65%.
Everyone knows Israel and Palestine are not massive players in the oil sphere, but all eyes will be on the second derivative players, Iran and Saudi Arabia. Their decisions and reactions to this war in the next few months will decide the fate of the oil market as we enter 2024.
There are many moving levers currently and it’s important to remember that this is currently a very localized micro war. That will likely not be the case in the coming weeks. Most of Hamas is supported by Iran and if it can be proven or inferred, the US will likely need to take action. This significantly increases the likelihood that the US will finally crack down on Iranian oil sanctions and stop the flow of Iranian exports.