Oil holds higher as markets digest escalation in Iran-Israel conflict

The open saw risk sentiment gap lower with WTI crude jumping to as high as $77 before falling back. Now, oil prices are still up 1% on the day but well off the earlier highs. It’s all about trying to price in what has happened and what might happen. Volatility is the name of the game to start the week. So, let’s see what are the potential drivers of that going into European trading later.

The thing about the oil price jump is that it pertains to Iran, OPEC’s third largest crude producer. And adding to that is potential concerns about threats from Iran in closing the Strait of Hormuz – which mainly impacts oil transport to the likes of China, Japan, and India.

It sounds serious but let’s take a step back to evaluate.

While Iran may be OPEC’s third largest producer, their influence has been dwindling over the years amid tensions in the region. China is of course their biggest customer and the one that will be impacted the most on any disruptions. There’s merit to the idea of restricted supply out of Iran as they close energy facilities with some being hit by the strikes as well.

But like all geopolitical tensions in the past, this will just be temporary. The oil market has now cast aside the supply glut issue but amid a temporary shock, it doesn’t mean a bullish market is in place.

The same argument applies to the Strait of Hormuz worry. Iran has threatened many times to close it over the years but have never been successful, at least not significantly. Sure, there’s possibility of disruptions and what not but we’re talking about shared waters. There’s going to be other military presence there, not discounting the US as well, and that will foil any plans to actually close the route for a meaningful period.

Amid heightening tensions, market players are getting caught up with anticipating the “worst case scenario”. But if there is any real spike in oil prices to $90 or $100, that’s an easy short in my book.

The fundamental dynamic in the market dictates that while the supply glut issue might have been oversold, this conflict in the Middle East doesn’t mean that the market has turned to become bullish either.

There’s a balance in there and I’d say we are still figuring it out around the $66 to $80 range before this all kicked in. As such, any major overextensions on the idea that the Iran-Israel conflict is going to disrupt supply for long is one that ought to be sold into. Buy value, sell hysteria; as the old adage goes.