Oil managed to find its footing at the beginning of the week amid escalating turmoil in the Mideast and confirmation that Riyadh and Moscow will sustain production cuts next month.
The Saudis may also continue unilateral cuts into 2024, the energy ministry suggested.
Ostensibly, producing nations are concerned about weaker demand. Crude dropped 6% last week, and there’s nothing left of the geopolitical risk premium that made a brief cameo in October.
This is problematic for the Saudis who need to keep a floor under prices. As Bloomberg dryly noted, Mohammed Bin Salman needs money not just to build his Jetsons city, but also to “purchase high-profile footballers and golfers.” For his part, Putin has a bloody war to finance.
From a macroeconomic perspective, the risk for the Saudis is that in keeping prices artificially elevated as demand falters, the Kingdom could perpetuate the situation. If the Chinese economy is struggling and consumers in the developed world are finally retrenching, high oil prices will only make things worse, undercutting demand further.
On the geopolitical front, there’s no supply disruption story. Not yet. For that, you need state-on-state conflict with Iran and frankly, the theocracy’s meek response to the Soleimani assassination in early 2020 showed that when push comes to shove, Tehran has no appetite for it. They’re content to project through Hezbollah, proxies in Iraq and the Houthis. A war with the IDF would be a war with the US, and that would mean the end of the regime. Khamenei knows that.
Notably, the war-related risk premium has come out of options too.
Recall that traders used oil (and gold and the VIX) to hedge spillover risk from the Gaza fight last month. The resultant call skew is gone. Blink(en) and you missed it.
Still, the presence of two raging wars leaves the door open to the reintroduction of geopolitical risk premium at any time. “Oil prices have remained relatively subdued despite escalation in the Middle East,” JPMorgan analysts led by Marko Kolanovic said Monday. “However, the conflict is not yet resolved and geopolitical risk is skewed to the upside.”
One bright spot: peace appears to be breaking out between Azerbaijan and Armenia. That at least materially reduces the odds of Baku going up in flames.
Bibi realizes that mullahs with Nukes are an existential threat to Israel. As U know, their Iron dome can’t protect them from nukes or even hypersonic missiles probably. IDF can’t take on Iran alone. Therefore he has a strong incentive to entangling US deeper into this conflict. I have no idea how exactly that will happen. The mullahs don’t want to risk any direct confrontation until they can muster the credible threat of a potential nuclear response. US Navy is committed to keeping Strait of Hormuz open. Saudi dazzled with absurd vanity projects. Also it appears that Ukraine/Russia may be arriving at a stalemate/frozen conflict. Oil sanctions haven’t been effective against Russia. And it seems that neither EU nor Repubs have any enthusiasm left for sending billions $$ more to Ukraine. Things there will wind down somewhat anyway for the winter I imagine. Mr. H: Ur Inconvenient Facts article is excellent.
With respect, which “mullahs” are equipped to deploy nuclear weapons? Other than possibly Pakistan, no Islamic nations have nukes.
According to a variety of a news sources, over the past decade, Iran has a very active nuclear weapons development program and are actively refining the fissile materials necessary. So it’s just a matter of time, very possibly in the near future they will have nuclear capability. So once that happens, it becomes an imminent existential threat to Israel since the mullahs openly declare their intention to exterminate the Zionist state. The Sunni Saudis aren’t thrilled either with a hostile Shia neighbor having nuclear weapons, when they are already tangling with them in a proxy war on their doorstep in Yemen. So the mullahs getting nuclear weapons… remind us of the famous words of HR Haldeman:” Once the toothpaste is outta the tube…..
Iran’s not going to nuke anybody.
US disclosure of an Ohio-class submarine in the ME area is sending a message to Iran. This particular one is reported to be a SSGN carrying cruise missiles (150+).
Unspoken part of the message is that other Ohio class submarines are nuclear armed (SSBN) and their presence is not revealed.
US has moved a large amount of force into the ME. Two carrier groups, a Marine brigade, a SSGN, Air Force F35 F15 A10s, probably others. Other NATO countries have moved ships there. These forces are conspicuously conducting exercises.
Iran and Hezzbolah have both been more circumspect in their actions (as opposed to their words) than one might have feared.