TOPSHOT - Demonstrators burn an Israeli flag during the funeral for seven Islamic Revolutionary ... [+]
The massive missile and drone attack by Iran on Israel apparently had minimal effect, with Israel claiming 99% of the 300 attacks were intercepted. Assuming that is indeed the case, the question remains as to whether Iran will attempt even larger attacks or consider honor satisfied, and whether or not Israel will retaliate against Iran directly, or for their part, be disinterested in further violence.
At present, Iran has said it has accomplished its objectives implying no further attacks are planned, while Israel has hinted that it will respond against targets inside Iran in retaliation. Prime Minister Netanyahu has talked about ‘victory’ and ‘winning,’ but it is not clear what constitutes victory: a cessation of Iranian attacks, damage inflicted on Iranian targets, or something further.
Needless to say, the oil markets will certainly respond on opening Monday since the situation has moved from fears of military violence to concern that violence would worsen, both in size and scope. Israel having attacked what was claimed to be a diplomatic building in Damascus, it is difficult to argue that they will exercise restraint, and Prime Minister Netanyahu is hardly a model of restraint. He might perceive political benefits from launching strikes against Iranian territory, despite the dangers of an escalating spiral of violence.
But this is an opportunity for Netanyahu to win some much-needed brownie points with President Biden, as de-escalation would lower oil prices. Gasoline prices are typically on the forefront of voters’ concerns and should Israel attack any Iranian oil facilities, not only reducing Iranian oil exports but threatening a wider conflict, it would augur ill for Biden’s re-election prospects.
Absent damage to either oil fields or tankers, it might seem that the oil market would not be affected. Fighting in Lebanon, Syria and/or Yemen will be largely distanced from oil production and trade, with the exception of Houthi attacks on Red Sea shipping, so far ineffective. Yet as long as the violence continues, the potential for escalation will keep the oil price elevated.
Ultimately, prices will moderate but until both Israel and Iran state they aren’t planning any further attacks, and Iranian proxies remain quiescent, there is going to be a security premium on the oil price. WTI should stay above $90, plus or minus, with either threat and even higher with more attacks, although the occasional missile or drone will not have much effect.
The possibility that a new Israeli attack would see Iran retaliate against U.S. bases in Iraq or Syria or U.S. Navy vessels in the area is a major concern. Any U.S. response will almost certainly be against military targets, not oil infrastructure, but at the same time, it would mean that violence, and fears of a wider conflict, will remain at the tops of oil traders’ minds.
There is an old African saying that when elephants fight, the grass gets trampled. In this case, it is oil consumers who will be trampled. The only question is how badly and for how long.
