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Two bunch of people would have started this week with long faces.

One, swing traders with long Brent positions itching to make a quick buck from all the tension in the Middle East — especially since Iran picked the most combustible moment in recent history to mark its first direct response to Israel’s shenanigans in Syria – only to find that this, of all events, was the buy-the-rumour-sell-the-fact variety.

Oil futures dropped on Monday because Tehran had already telegraphed its intentions, even made phone calls to important capitals, so the market had priced in the geopolitical risk premium ahead of the weekend. Besides, this particular Israeli strike in Damascus was different. It targeted the Iranian embassy, effectively Iranian soil, and killed a number of very senior national guard generals. And there’s already a very strong precedent of Iran not exactly holding back when its elite commanders are gunned down. Remember the barrage of missiles it launched at US bases in Iraq, causing dozens of “brain concussion injuries” to soldiers, after Donald Trump ordered the killing of General Soleimani in Iraq in January 2020?

So, the writing was on the wall.

And two, the hawks that surround Benjamin (Bibi) Netanyahu in Israel’s fanatic, rabid right cabinet that has very little legitimacy even inside the country. They didn’t think it was possible, but they finally found out this Monday that Washington does not see an attack on Israel as an attack on the United States after all; and made it crystal clear that it would not be part of any Israeli counter attack to the Iranian counter attack.

That means Bibi’s gambit has failed.

Everybody who knows the region expected Netanyahu to raise the stakes after Israel was stung by the American abstention as the UN Security Council adopted a resolution demanding an immediate ceasefire on Mar25. He needs more Palestinian scalps to keep his own head from rolling in domestic politics, where his critics have started calling his genocidal campaign a “tactical victory but a strategic failure”.

But Biden first forbade him from entering Rafah, then held back at the UN. That left him badly isolated just when he needed his tanks in southern Gaza. So provoking a reaction from Iran, with the guarantee (more or less) to draw America into the war seemed like a pretty good, if predictable, idea.

Till it wasn’t.

Now Bibi’s driven into a darker, lonelier corner. He needs to back his chest thumping in the Knesset with more dead bodies or face the chop at home. But that’s not possible if Genocide Joe isn’t on board. And he’s no longer on board, at least not to kill more women and children in Rafah.

That leaves him with only one option; to leverage the bloodlust in his hawkish war cabinet and go it alone, probably provoke Iran further by hitting Hezbollah in Lebanon. For Netanyahu, it’s a simple choice; either all this or get stripped of the premiership, get arrested, face a long corruption trial and a longer jail sentence.

That’s why the oil market isn’t ready to price out all that geopolitical risk premium just yet; leaving a small window for speculators who got their fingers burnt this week to make up for some of their losses. And there are a few different theories, or contingencies, doing the rounds.

Citigroup expects oil to hit hundred if there is further escalation.

“What is not priced into the current market, in our view, is a potential continuation of a direct conflict between Iran and Israel, which we estimate could see oil prices up to +$100/bbl, depending on the nature of the events,” Bloomberg quoted it as saying.

Others, like Lipow Oil Associates, as quoted by CNBC, said “any attack on oil production or export facilities in Iran would drive the price of Brent crude to $100, and the closure of the Strait of Hormuz would lead to prices in the $120-130 range”.

And Societe Generale has issued the most ominous warning yet, that “an escalation involving the US could send oil surging to $140 per barrel”. That’s Biden’s nightmare scenario. Already, stubborn inflation is keeping the Fed from cutting rates and therefore American businesses and households unhappy when the election is just round the corner. And Joe will do himself and the Democrats no favours by engineering another round of high inflation across the world just because Bibi wants to kill more people so he can keep his seat as PM.

That’s why energy and utilities strategist Morningstar, which sees “more downside risks than upside at the moment”, could be right. It sees “higher potential to touch $75 by the end of 2024 versus a sustained movement beyond $100 a barrel”.

But for Morningstar’s reading of the market to be right, Netanyahu has to be wrong about his reading of further US endorsement of his madness.

So, keep your eyes on Brent.

Copyright Business Recorder, 2024


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