Oil's War Premium Will Fade After Israel's Iran Strike

When it comes to oil and war in the Middle East, the moment to sell has been when the bombs start to fall.

The “buy the rumor, sell the fact” adage has held as the market realized that worst-case scenarios would be avoided. Back in January 1991, oil prices plunged just when US warplanes bombed Iraqi positions in occupied Kuwait. In March 2003, prices fell soon after US missiles hit Baghdad in the opening of the Iraq War.

Now, in the wake of Israel’s strike on Iranian targets, I believe the market will follow a similar pattern. While it would be wrong to completely dismiss the Israeli attack, the biggest aerial bombing the Islamic Republic has suffered in 40 years, the worst-case scenario hasn’t materialized. The situation is fluid, and much depends on how Tehran responds, but we can draw a few tentative, mainly bearish, conclusions.

1) Israel confined its retaliation to military sites. It didn’t hit either nuclear sites or oil fields. In doing so, Israeli Prime Minister Benjamin Netanyahu followed the advice from US President Joe Biden, who on Oct. 4 said: “If I were in their shoes, I’d be thinking about other alternatives than striking oil fields.” Iranian state-owned media quickly confirmed on Saturday that the oil industry was producing and exporting crude as “normal.”

2) So far, Iran is downplaying the Israeli bombing. State media called the strikes “weak” and claimed — falsely— that Tehran had “successfully intercepted” the attack. The commentary suggests an effort by the authorities to manage the narrative so a response against the attack is unnecessary. Oman, which typically serves as a go-between for Tehran and Washington, also pushed the same narrative. The Omani foreign minister said the “the damage appears limited” – diplomatic code for “let’s call it even and go back to the status quo prevailing a few weeks ago.” I see many reasons why that’s exactly what Tehran is going to ultimately accept.

3) The bullish oil narrative was centered on two elements: First, Israel would attack energy facilities in Iran; and second, that Iran could respond by targeting oil fields across the Persian Gulf in Saudi Arabia and other OPEC+ member nations. The first element of that narrative didn’t occur, and the second looks today even more far-fetched than yesterday. As I have written, the oil market hasn’t fully appreciated the change in tone of Saudi-Iranian relations, and how that shift has reduced the possibility of Iranian strikes against its neighbor. On Saturday, Riyadh took an important step: It publicly condemned what it called was the “military targeting of the Islamic Republic of Iran.” To me, it sounds as Saudi Arabia is doing its best to be left alone.