The escalation in hostilities between Israel and Iran has for a while almost felt like an eventuality rather than possibility. This does not take away the remarkable reaction seen in oil futures prices in the early hours of Friday morning. There are some, including the occupant of this seat, who have questioned the wisdom of almost 24-hour trading in oil derivatives. There is a case for such a state of openness in the massive markets of forex, equity bourse indices, bonds and other of such voluminous ilk, but commodities and oil do not have such liquidity outside of the normal European/US trading hours. When dramatic or catastrophic news occurs externally to the expertise found in the traditional geographic trading centres, the price moves are often violent, exaggerated and not commensurate in value to the underlying driver. The nigh $10/barrel rally in M1 Brent is somewhat understandable, but the M1/M2 spread move is almost disreputable. Settling at $0.92/barrel Thursday, at the height of Friday’s early hours panic it traded to an astonishing $4.04/barrel. Such a value is only ever seen at the height of extreme tightness, near expiries and were never witnessed to such extreme even at the historical high in Brent flat price of $147.50 and other notable events. ICE Brent futures is representative of the North Sea basket and thereby the marker of global value and all the ‘pricing’ it entails. Illiquid periods unless policed by ‘limits’ or ‘circuit breakers’ as they are referred to in equities, must at least be considered or more examples of such ludicrous moves will be seen particularly in a world that is insisting on ever-growing antagonism and partiality to settle by war.
Berating on market practices aside, the very emotive notion of all-out war between Iran and Israel is well worth a ten-dollar flat price rally, and the flow chart of ‘what happens next’ is as clear as what might next emerge from the current incumbent of the White House when he awakes in the morning; be it a tariff, a dig at Elon or to throw scorn at Iran with an almost ‘I told you so’. Truth Social made a mockery of the US declaring Israel’s attack as ‘unilateral’. “I gave Iran chance after chance to make a deal […], the United States makes the best and most lethal military equipment anywhere in the World, by far, and Israel has a lot of it […] Iran must make a deal.” There can be little doubt that Benjamin Netanyahu sought a green light from the Oval Office before turning the heat control on the geopolitical oven to maximum. With progress in the nuclear talks all but stalling, the attack is a matter of convenience for the US and while Iran’s proxies are happily and easily listed, is it really too offensive to define Israel with a similar description in relationship with Uncle Sam?

Indeed, proxies are very relevant to this stream of argument that eventually ends with Iran having to make a deal. Israel’s systematic and strategically brilliant taking out of Hamas, Hezbollah, Syria and the other centres of Iranian allies has left the Islamic Republic isolated and weaker than it might have ever been since the start of the Iran/Iraq war in 1980. With a failing economy, raging inflation and unemployment, and growing opposition to the current way of life, Tehran needs all the help it can get. That help comes in the form of petrodollars, it has little else in the economy to match it. The panicked buyers of Friday morning envisage a blockade of the Strait of Hormuz, the Arabian Gulf, the Gulf of Oman and possible attacks on the oil wealth of fellow Arabian neighbours. Twenty-million barrels per day or 20 percent of the world’s daily oil flow being interrupted is rightly frightening, but such a hiatus in oil movement would be brief before the US and allies including Saudi Arabia start parking aircraft carriers and hundreds of military aircraft in the vicinity. An arguable insight into Tehran’s thinking is that it was at pains to point out that the attack of Friday did no damage to its oil industry, even though a fuel depot was blown up on the outskirts of Tehran at the weekend. If it wants to keep doing business with China and to a lesser degree India, it must reassure that oil will keep flowing. This cannot be in a state of blockade. Might Iran lash out in a greater and unforeseen way? Who could honestly bet against the possibility? But the country would receive reciprocal military attention in multiples. Those that are sensitive to oil prices and those that trade them are right to be geared for the bullishly unexpected, but the walls are drawing in on Iran and the only emergency exit at present appears to open into the corridor of a Donald Trump deal.

Speaking of things that in past and so-called normal times seeming unlikely, the US President has thrown another curveball into the equation of something one could never envisage. In an interview over the weekend when bemoaning that he was never given enough credit for his diplomatic prowess, he informed ABC News on how it might be a good idea to introduce Vladimir Putin as mediator between Israel and Iran. The acerbic wits and satirists of our time will have a field day with such a proposition, but for the rest of us trying to plot a path of reason for oil trading and price prediction it is another head in the hands’ moment and a sigh of “did he really just say that?”.

For the moment the risk premium in oil prices will abide, the situation is way too liquid and fresh for it not to. But here is the cynical rub. There has hardly been a war in recent oil-price historical sensitivity that took barrels of supply from the market. It is never in the interest for battling parties to make it so. As stated previously, Iran needs its oil to get to water, and Israel cannot be a new agitator in inflation by actions that push oil prices into economically harming levels. Its greatest ally would not tolerate it. If this just turns out to be another bout of missile exchange that will fade because of depleted arsenals, markets will adjust and become bored with it and oil prices will echo such fade. Grander notions of what might happen in Benjamin Netanyahu’s desire for regime change in Iran and the vacuum it would create is a consideration for another time. For now, we can all only play the cards in front of us and it really is like raising the stakes while betting blind.

Overnight Pricing