At last. A rather obtuse and probably undignified way to greet an attack by one sovereign state into another. Yet it is one that most of the oil fraternity shares. This of course refers to the early hours of the Middle East Saturday clock when Israel launched precise and wave-like ariel attacks on military targets in Iran, which has since been made public as operation ‘Days of Repentance’. The market has been held in thrall over what might happen for weeks on end, it has not mattered where one sets a bar on oil prices compared with the macro environment or indeed the fundamental one, sweeping all before it, and any attempts on maintaining correlative values, have been the almost daily swings in sentiment as to what the outcome might be. Evidence can be found of the flightiness of opinion in how such influences as the Chinese stimulus news is delivered and probably consumed. Depending on the Middle East geopolitical mood of the day, stimulus is all bullish during times of failed ceasefire negotiations, the latest killing of an Iranian proxy leader and verbal sabre rattling. The alternative, China’s poor personal consumption, reduced refinery runs, and that stimulus is unconvincing being worked into a dip in oil prices when the latest supposed diplomatic breakthrough is made, or conciliatory language fleetingly drowns out the warmongering rhetoric.

It is tempting to bring forth an array of bearish arguments when taking into account the words of the main protagonists in the aftermath of Saturday’s attack. Yesterday, in a considered address, Ayatollah Ali Khamenei said that Israel’s attack “should not be exaggerated or minimised” but stressed any response is in the remit of the Iranian military. With a strategic adviser calling on the West to recognise Iran’s resolve for peace, a delivery of a letter form Iran’s mission at the UN accusing Israel of a breach of Iran’s sovereignty and the dismissing of Israel’s strike by Iranian military officials as a failure, any headlong rush into more hostilities does not appear to be signalled from Tehran. Whether or not there is cynical orchestration afoot remains to be seen, but Israel also indicates that honour has been satisfied. When IDF spokesman Daniel Hagari announced the strikes into Iran, he stresses his words on ‘precise’ and ‘military targets’ as if trying to put a sense of proportionality on the action. Indeed, and while warning against an Iranian response in kind, Israeli Prime Minister Benjamin Netanyahu said, “the attack on Iran was precise and powerful, achieving all its objectives,” which very much sounds as if this bout of hate thy neighbour is over. The US seems to think so, or at least is publicly prescribing to a cooling. President Biden is quoted on various media as saying that this should be the end of the direct fire between the two.

So, sell everything then, right? Well, no, not yet. Imminent all-out war premium probably deserves to be taken off the table, but there is little reassurance that such intrigue will not return in the not-too-distant future. Or, when such brinkmanship turns into the everyday and oil prices learn to live with it. Before that, only a copper-bottomed, signed, sealed, delivered end to hostilities in all of its many guises will stop war sentiment, but in millennia of tragedy, there is no guarantee. There cannot be any doubt that Israel’s response has been heavily influenced by the Biden administration in front of the US election. In the ‘too-close-to-call’ ballot in a week’s time, the biggest consideration of the year must not be impeded by the biggest ‘conflict’ consideration of the year. If the outcome of the vote is unclear, how much more would it be under the influence of torched oil-ware and Heaven forbid, ‘fallout’ in all its senses from an attack on a nuclear facility? Behind the dovish postscript from both Israel and Iran there remain hardliners who want war and rhetoric dialled up, not down. Indeed, there are some in military circles suggesting that the attack on missile batteries and other defence hardware was something of a probe and that the weakening of Iran’s surface-to-air capabilities means Israel may plan another visit sometime soon.

The here and now of it

Still, the relief in oil prices is palpable. Whether or not there is enough time for actual fundamentals to shape the next moves is as much of an evens bet as all the other major global goings-on. Returning to China, as one must bearing in mind its significance to our market, this morning’s news brings another shadow. According to a Reuters source, PetroChina will close the 410kbpd Dalian petrochemical plant that represents 3% of the nation’s processing. While this is in line with a previous plan to move and replace, the question will come as to whether investment in any substitution will be forthcoming bearing in mind the recent lowering of China’s oil demand from OPEC and the IEA and the lack of demand for petroleum products both domestically and internationally.

If fundamentals can now be considered, there is plenty in the macro-economic environment that has had to be ignored because of the over-bearing influence of the Middle East. Elections are all the rage at present, but it is Japan’s inability to reach a majority over the weekend that causes much of the moves in bourses and currencies this morning. With something of a hung parliament, any expected hawkishness is evaporating causing a real issue for the Yen again and by default another prop to the current all conquering US Dollar. Those that are looking for a turn in the in the greenback might just be disappointed because this week sees the release of the Eurozone inflation and GDP. There is no doubt the ECB is mulling an interest rate cut and the likelihood remains that the European rate reductions will outpace those of the US with the inevitable march on from King Dollar. The only US data of significance before the US election is the Non-Farm Payrolls on Friday, giving an easier look into what Harris or Trump will mean for oil. The trouble is, as much as we in the oil community wish to avert our gaze elsewhere, be it to fundamental, macro or political drivers, the events of the Middle East will not allow it.

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