The oil market is trying to regain some of its sea legs and has found some contributary bullish aids in doing so. Yesterday's announcement by the US DoE that it would seek up to another 3-million barrels of additional oil for its Strategic Petroleum Reserve (SPR) refilling, introduces a fundamental buyer into a category which at present has been sparsely populated. This morning's news that Israel has passed legislation banning the UN aid agency UNRWA from operating in the country is a smack in the face to diplomatic solutions. It will no doubt cause more suffering for the beleaguered people of Gaza and even though Israel's claim that UNRWA has terrorist sympathisers, none now which can be proved, the belligerence of Tel Aviv even in humanitarian terms serves as an antidote that cooler heads are prevailing within the Israeli government. Yet, prices have not seen fit to react as WTI shies away from $69/barrel and Brent from $72. Conflict buying has been shelved for the moment until the next outrage or probably when Israel's leash might very well be loosened after the US election.

The cause and effect of the macro suite will largely be ignored from oil participants. Bourses, bonds and their like are surrounding by competing drivers and they too are hunkering down. Not only are the mega caps reporting results this week, starting with Alphabet/Google today, it is the start of the month which is accompanied as always with a swathe of employment data from JOLTs, ADP, Jobless Claims and eventually the Non-Farm Payrolls. With an ECB decision, the US election and the week after a FED meeting, markets might just adopt something of a protective stance.

Respite Does Not Mean Conclusion

There are many reasons to fear escalation in attacks between Israel and Iran through the prism of an oil perspective. Our fraternity envisages a scenario in which Israel strikes at the heart of Iran’s oil sector or worse still, its nuclear ones and in-kind Iran then lashes out at its neighbours’ petroleum industries. The nightmare being based around substantive damages to Saudi’s oil wealth and the ensuing revenge that will no doubt be meted out by the Kingdom. However, it is not only just infrastructure damage that might just cause a cascade of hostilities in the region. Invasion of sovereignty in an area full of borders means that attacks may not come from the within the lands of the main protagonists.

The attack in the early hours of the Middle East from Israel on the military and missile manufacturing capabilities of Iran saw an unwelcome flyover and invasion of the airspace of Iraq. In a letter to the United Nations, Iraq has condemned the use of its airspace by Israel to attack Iran. A statement from government spokesman Bassim Alawadi said the letter complains on, "the Zionist entity's blatant violation of Iraq's airspace and sovereignty by using Iraqi airspace to carry out an attack on the Islamic Republic of Iran on October 26”. Such forthright language reveals how Iraq is endeavouring to put distance between itself and any perceived collusion with Israel. Afterall, the country boasts many militias that are proxied to Iran who vow war upon Israel. Therefore, with Israel using the air-corridor policed by the US over Iraq since Gulf War II, balancing Iraq’s ties between the US and Iran has just been made so much more difficult. It does not take much of an imagination to foretell of Kataib Hezbollah or their like loosing surface-to-air missiles into the US flight corridor if Israeli air incursions continue, and the US then being dragged into open conflict with Iranian backed forces. Where then do the planes of the IDF find passage to Iran? Through Saudi? Definitely not, there is no way the Kingdom will be involved in anything that smells of helping Israel, no matter its enmity towards Iran. A loop over the top from Syria? This brings an ominous confrontation with Russia let alone Turkey and its own flow chart of ‘what if’ war fallout.

Oil prices yesterday rightly lost their imminent conflict premium. However, and despite the many-voiced opinion that Israel’s supposed contained attack might bring a bout of cooler attitudes is premature. The response was crafted and sanctioned in the US and what at first appears to be a light touch, is in fact all to do with the US election and nothing else. There are only so many times that Benjamin Netanyahu can thumb a nose its closest ally. Gripes galore come from within the UK and Europe on arms supplies to Israel, and while they may be ignored, specificity of targets from the US cannot. Israel has launched ordnance into nearly all its neighbours and the attacks on Hamas and Hezbollah are 24/7. Its rate of munition use must be extraordinary and there really is only one place that it can find replenishment. Therefore, in front of the US election, if Israel is told not to attack Iranian oil or nuclear facilities it must adhere. This abidance has come with a sweetener. Not only has the US agreed to supply the Thaad anti-missile system, it has also allowed 100 US army personnel to operate it, which as an aside adds something of conundrum for Iran if it were to attack the new batteries.

Unless there is another Iranian counter to the counterattack (recurring), the run up to the US vote next week will likely see Israel limit its operations to proxies rather than Iran itself. After the election it is a guess. There is plenty of speculation outlining Saturday’s incursion as a softening up of Iranian air defence capabilities and it is indeed interesting on how Israel has not challenged Iran’s claims that damage to military sites was limited. Maybe the strike is just a warning to Iran that Israel’s Airforce can come with impunity. Maybe it is a softening up tactic before the real targets are hit. Maybe the incursions into other nation’s airspace will be the spark that finally blows up the tinderbox or maybe we all have way too much imagination. Yet this is the problem for those that track and trade oil prices. Rather than taking away pathways to war, the attack on Saturday has arguably added more. Respite may currently be upon our market, but speculative anxiety armed with some of the above drivers cannot abate.

Overnight Pricing