Oil is an imperfect gauge of Middle East risk
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By George Hay
LONDON, July 31 (Reuters Breakingviews) -Oil prices are often seen as a key gauge of geopolitical risk. One interpretation of Brent crude’s 2.5% rise on Wednesday might therefore be that commodities traders aren’t excessively concerned about the danger of a wider war in the Middle East, despite the assassination of senior Hezbollah and Hamas leaders in attacks blamed on Israel. That might not quite be the full picture, though.
On the face of it, oil traders certainly seem like a sanguine bunch. Despite an increasingly protracted war in Gaza, crude prices since the start of 2023 have stayed largely in a $75 to $85-a-barrel range, according to the Oxford Institute for Energy Studies. When Iran launched hundreds of missiles at Israel in April, Brent’s instant reaction was to fall. That’s a far cry from February 2022, when it spiked 30% after the Russian invasion of Ukraine.
The tepid reaction to the killing of Hamas political chief Ismail Haniyeh in Tehran may just be because traders can’t see a Doomsday scenario where Iran ends up blocking the Strait of Hormuz, through which a fifth of global oil supply passes daily. Short of that, they may assume that the global flow of oil remains relatively unimpeded. After all, in the first half of 2024 daily global oil output from Russia, Iran and Venezuela was only 300,000 barrels lower than in 2019, the OIES reckons, despite Western sanctions on all three states.
Brent gyrations are a fuzzy signal, though. Global oil demand forecasts are currently getting revised down, dampening any price spikes caused by geopolitical risks. Furthermore, oil traders may just be wrong: Haniyeh’s killing takes place amid genuine concern that Israel and Iran-backed Hezbollah are about to go to war. That could lead Tehran into a wider conflict, and arguably threaten Hormuz.
But there’s a more basic problem. Nailing down exactly what oil traders do and don’t think is more complicated in 2024 than it used to be. That’s because machine-led algorithmic trades are a much bigger proportion of daily oil trading — as much as 70%, according to TD Bank and JPMorgan research. A big chunk of this is so-called Commodity Trading Advisors (CTAs), which might automatically sell if, say, the 20-day moving average price exceeds a certain price threshold.
Depending on the rules they follow, CTAs can exacerbate price spikes as well as downplay them. But right now the scale of their presence may be doing the latter. For anyone trying to glean where the Middle East crisis goes next, that’s not very helpful.
Follow @gfhay on X
CONTEXT NEWS
Hamas leader Ismail Haniyeh was assassinated on July 31 in Iran, the Palestinian militant group and Tehran said.
Iran's Revolutionary Guards confirmed the death of Haniyeh, hours after he attended a swearing in ceremony for the country's new president, and said it was investigating.
As of 1345 GMT, Brent crude prices were trading at $80 a barrel, up 2.5%.
Haniyeh, normally based in Qatar, had been the face of Hamas's international diplomacy as the war set off by the Hamas-led attack on Israel on Oct. 7 has raged in Gaza. He had been taking part in internationally-brokered indirect talks on reaching a ceasefire in the Palestinian enclave.
The assassination took place less than 24 hours after Israel claimed to have killed Hezbollah commander Fuad Shukr, who it said was behind a deadly strike in the Israeli-occupied Golan Heights.
"Political assassinations and continued targeting of civilians in Gaza while talks continue leads us to ask, how can mediation succeed when one party assassinates the negotiator on other side?" Qatar Prime Minister Sheikh Mohammed bin Abdulrahman Al Thani wrote on X, formerly known as Twitter.
Egypt said it showed a lack of political will on Israel's part to calm tensions. China, Russia, Turkey and Iraq also condemned it.
Middle East tensions have not yet sent oil prices soaring https://reut.rs/4ca9yk5
Editing by Francesco Guerrera and Streisand Neto
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