Javier Blas of Bloomberg reports that oil traders are taking a “this time is different” approach to war risk. Blas writes:
When Israel invaded Lebanon in July 2006, oil prices jumped nearly 10%, rising to about $80 a barrel. Fast forward to the present day, and the price reaction has been remarkably similar. The fighting, though, is worse. Far, far worse. For evidence, look at the exploding walkie-talkies, the assassinations of the leaders of Hezbollah and Hamas, and the barrage of Iranian ballistic missiles hitting Tel Aviv just days ago.
Back in 2006, the energy market mulled whether oil supply was at risk. That mere speculation, which few thought was probable, was worth a 10% price rally. Now we know oil supply is under threat. So much that US President Joe Biden publicly admonished Israel last week. “I think if I were in their shoes, I’d be thinking about other alternatives than striking oil fields,” Biden said Oct. 4. Shockingly, the confirmation by the White House of a live discussion about an Israeli oil attack is worth the very same 10%. […]
If the market were currently pricing in a worst-case scenario, it would look very much like the “mother of all oil supply shocks.” The plot would go as follows: Israel strikes the Iranian oil export terminal of Kharg Island, from where the Islamic Republic ships 90% of its production; Tehran, in turn, retaliates by bombing oilfields in Saudi Arabia, Kuwait and the United Arab Emirates, affecting a large chunk of global output. Immediately, an all-out regional war has broken out, closing the Strait of Hormuz, the shipping lane for most Middle Eastern oil. That’s worth a lot more than a 10% price jump. […]
But past performance doesn’t guarantee future returns. If a wider regional war explodes in the Middle East, the oil market will be shocked to its core, forcing everyone to reprice. The five reasons listed above provide resilience but don’t eliminate risk. If anything, they can fuel a “this time is different” complacency that could bite the back of the market at the worst possible time. Just hope cooler heads prevail.
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