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Clocktower Group: Limited Macro Significance of Israel’s “Pearl Harbor” (Sunday reaction piece)

Marko Papic says the recent history of the Israeli-Palestinian conflict is that it is macro irrelevant. This century, several incidents have had no perceptible impact on crude prices.

A disproportionate response by Israel against Hamas, one that involves large number of civilian casualties in Gaza, will likely sour Arab-Israeli relations and potentially scuttle the normalization of relations between Sunni Arab states and Israel. This will make Israel less safe in the long term and serve the interests of its chief regional rival, Iran. Click here for the note.

Gavekal: The Constraints On Conflict (October 12)

All significant parties—with the exception of Hamas itself—have powerful incentives to avoid a broadening of the war to the wider region. And so far they have acted accordingly.

This suggests that the market has been correct not to bid up the price of oil aggressively. However, should there be some disruption to supply, and prices rose, Saudi would most probably lift production.

Saudi wants an oil price above US$80/bbl to help balance its budget, it does not want the demand destruction and accelerated shift away from oil that would set in should the price rise significantly above US$100/bbl for an extended period. Click here.

Forest for the Trees: US won’t sanction Iran in order to save the US Treasury market (October 10)

US has been allowing Iran to export more oil in an attempt to keep oil markets calm, keep UST markets calm (higher oil prices mechanically force more UST selling), and to inflict more pain on Russia.

If the US wants to inflict pain on both Russia AND Iran, it will be effectively sanctioning oil suppliers that make up 23% of global oil export markets, pushing oil higher, and potentially leading to more Treasury selling. Click here for the full note.

See the more detailed FFTT piece on USD/Oil driven feedback loop on US Treasuries here.

Gavekal Research: War in the Middle East – more uncomfortable memories; risks to bond markets (October 10)

Charles Gave is old enough so that the events of the Yom Kippur war of 1973 are a memory, rather than just a piece history, and he draws upon this to provide some insight into the implications from the new conflict in Israel.

In the 1973 war, an Arab oil embargo caused a sharp rise in oil prices, leading to inflation, recessions, and fiscal crises in Western countries. The current conflict in Israel raises concerns about potential long-term effects on two main vectors: oil prices and interest rates.

To hedge such risks, Gave suggests that investors should consider holding bonds outside OECD markets, owning gold, selling shares of state-dependent companies, and avoiding businesses reliant on consumer spending in highly indebted countries. Click here for the full report.

MUFG: Commodity markets reactions are often more ephemeral than geopolitical events (October 12)

Whilst there has been no impact on current global oil production from the conflict in the Middle East, MUFG recognise two medium–term reverberations on global oil supplies

1) A reduced likelihood of imminent Saudi–Israeli normalisation and with it an accompanying increase in Saudi oil output; and (2) downside risks to Iranian oil production should sanctions enforcement strengthen. Click here.

The Schork Report: Oil markets; How dependent US is on oil imports; probabilities of $100+ oil

For most of 2023, US imported just over 6 MMB/d of crude. 1 MMB/d from OPEC, with 0.6 MMB/d from the Gulf. The blance came from Canada and Mexico. US domestic production is still hovering around pre-Covid levels of 12.9 6 MMB/d. The threat of reduced supply, via closure of Straight of Hormuz could see oil above $100/b

Given volatility of oil last week, 5% probability of Dec ICE Brent hitting $100/b before Oct 31 expiry. Given price action Monday/Tuesday odds moved up to 13%, and now 17% probability that $100 is reached by the end of the year. Click here for the full report.

Rabobank: The global insecurity order (October 11)

While nothing can be predicted, we share likely geopolitical scenarios that could emerge; as one includes far greater global bifurcation, we should pray for the best in the Holy Land.

For energy, a contained conflict will see the recent price spike reversed. However, instability closing the Suez Canal would see oil near $100 and European TTF at €80, and if the Straits of Hormuz are hit, oil at over $150 is achievable.

For food and agri, an Israel–Gaza war is manageable. However, if it spreads to the broader Middle East, developments on fertilizer supply and grains, meat, and dairy demand could be notable. Of course, the energy issue transcends all of these for farmers, as for everyone. Click here.