Oil Prices in now controlled by Saudi Arabia
Posted: Mon Oct 09, 2023 8:52 am
Hamas invades Israel: a rare time to stay long oil risk, in context
From 22V Research Team
October 08, 2023
Oil futures open the Sunday night session with a leap of more than $3.50 per bbl. When Saudi Arabia was hit by Iran in September 2019, our view was the price spike of that Sunday night would prove short lived and so should be sold into. That assessment proved correct.
Here, we would NOT fade a surge in price tonight. We would wait and see.
In other words, we would remain long crude and product futures as the primary view and hold the CLZ3 $90 puts as a hedge.
The new market forces here are more durable. Oil futures prices are likely to remain bid into next week and possibly beyond. The oil price path will henceforth depend a lot on how Saudi Arabia responds.
Bearish risk: This may be the surprise. The Kingdom may opt to increase their oil output as a gesture of peace and to try to curb upward oil price pressure. But there is no guarantee they will do that. They may instead exploit Israel’s pain. The Kingdom’s expressed policy is the intended inclination to surprise traders. We take them at their word that they should be interpreted as a wholly unpredictable actor. They speak of “lollipops”, “outchie”, and other pet words that defy adult speak and adult decision making. In fact, though we are highly sympathetic to cultural differences and genuinely hold the professionals at Aramco at the highest respect, we would say most respectfully it would be extremely more helpful if the Saudis stopped using baby talk in the English language.
At the end of the day, the Saudi ministry have been withholding crude oil supply and it’s an open question if they will reverse course. It would be helpful if they increased production immediately.
Bullish risk: Of course, a lot will also depend on how Washington responds. It is highly likely that US sanctions will be quickly reimposed on Iranian crude exports (1.3 million b/d on 3.0 million b/d of production). The parallels to 1973 are obvious but one big difference is Riyadh and Tel Aviv had been on the verge of normalization (one of the causes for Hamas to strike and try to disrupt that peace process).
This war, paradoxically, may be one factor that seals a deal on Saudi Arabia’s formal recognition of Israel’s sovereignty for the first time since its founding in 1948. There will be a lot of complex diplomacy designed to try to forestall worse outcomes.
Whatever happens next, Saudi’s hand is strengthened here, and the most important fact to know is they hate the Iranians. Here we would more emphasize: (1) Sunni v Shia Islam (Saudi vs Iran), and (2) Order (nation states) v Disorder (militant groups), rather than (3) Arab v Jew. This is not your grandparents’ Middle East war. Saudi Arabia and Israel are probably already allies.
Much like the world’s disgust became an overpowering factor against the Kremlin’s interests over Russia’s unilateral invasion of Ukraine, Iran’s theocracy has now invited the disgust of the entire world. This is a potentially catastrophic mistake for Tehran. We suspect that, like Putin, Iran’s leaders have vastly underestimated how painful this isolation will be felt within Iran. Iran’s population centers on an exceptionally youthful, educated, and otherwise worldly coterie. Recall the purple fingers in 2005? It was literally just two days ago that the 2023 Nobel Peace Prize was awarded to jailed Iranian activist Narges Mohammadi (to be honest, very likely not without appreciation of context). Nonetheless, the mullahs have now created a conflict within this group.
Knowing human beings, we suspect this was an exceptionally incompetent strategy.
The Americans will want to prove that the attack against Israel did not derail the peace process they crave.
In the moment, the Saudis now hold a much stronger geopolitical hand than they did just a few days ago. The Americans will want to prove that the attack against Israel did not derail the peace process they crave. The Saudis really want the defense guarantee, know they now have a better shot of getting from the Israelis some additional chits on Palestinian interests, are willing to float 1 to 2 million b/d of crude oil into world markets to “stabilize” balances, and were willing to acknowledge Israel anyway, which will frustrate their enemy, Iran, should it occur, but now under the formal protection of the US Fifth Fleet.
Strap in. We’re in the highest-stakes chess match. < MY TAKE: This is not a Short Term event. Hamas did a lot of damage and they killed a lot of innocent people. Irael will respond with a lot of force. Team Biden is crapping in their panties. Republicans will scream that none of this would have happened under Trump's watch. BTW we should get a new Speaker of the House this week.
We would add that copper futures sold off on the open in global futures markets but are now reversing to the upside as commodities are generally bid on the geopolitical shock.
From 22V Research Team
October 08, 2023
Oil futures open the Sunday night session with a leap of more than $3.50 per bbl. When Saudi Arabia was hit by Iran in September 2019, our view was the price spike of that Sunday night would prove short lived and so should be sold into. That assessment proved correct.
Here, we would NOT fade a surge in price tonight. We would wait and see.
In other words, we would remain long crude and product futures as the primary view and hold the CLZ3 $90 puts as a hedge.
The new market forces here are more durable. Oil futures prices are likely to remain bid into next week and possibly beyond. The oil price path will henceforth depend a lot on how Saudi Arabia responds.
Bearish risk: This may be the surprise. The Kingdom may opt to increase their oil output as a gesture of peace and to try to curb upward oil price pressure. But there is no guarantee they will do that. They may instead exploit Israel’s pain. The Kingdom’s expressed policy is the intended inclination to surprise traders. We take them at their word that they should be interpreted as a wholly unpredictable actor. They speak of “lollipops”, “outchie”, and other pet words that defy adult speak and adult decision making. In fact, though we are highly sympathetic to cultural differences and genuinely hold the professionals at Aramco at the highest respect, we would say most respectfully it would be extremely more helpful if the Saudis stopped using baby talk in the English language.
At the end of the day, the Saudi ministry have been withholding crude oil supply and it’s an open question if they will reverse course. It would be helpful if they increased production immediately.
Bullish risk: Of course, a lot will also depend on how Washington responds. It is highly likely that US sanctions will be quickly reimposed on Iranian crude exports (1.3 million b/d on 3.0 million b/d of production). The parallels to 1973 are obvious but one big difference is Riyadh and Tel Aviv had been on the verge of normalization (one of the causes for Hamas to strike and try to disrupt that peace process).
This war, paradoxically, may be one factor that seals a deal on Saudi Arabia’s formal recognition of Israel’s sovereignty for the first time since its founding in 1948. There will be a lot of complex diplomacy designed to try to forestall worse outcomes.
Whatever happens next, Saudi’s hand is strengthened here, and the most important fact to know is they hate the Iranians. Here we would more emphasize: (1) Sunni v Shia Islam (Saudi vs Iran), and (2) Order (nation states) v Disorder (militant groups), rather than (3) Arab v Jew. This is not your grandparents’ Middle East war. Saudi Arabia and Israel are probably already allies.
Much like the world’s disgust became an overpowering factor against the Kremlin’s interests over Russia’s unilateral invasion of Ukraine, Iran’s theocracy has now invited the disgust of the entire world. This is a potentially catastrophic mistake for Tehran. We suspect that, like Putin, Iran’s leaders have vastly underestimated how painful this isolation will be felt within Iran. Iran’s population centers on an exceptionally youthful, educated, and otherwise worldly coterie. Recall the purple fingers in 2005? It was literally just two days ago that the 2023 Nobel Peace Prize was awarded to jailed Iranian activist Narges Mohammadi (to be honest, very likely not without appreciation of context). Nonetheless, the mullahs have now created a conflict within this group.
Knowing human beings, we suspect this was an exceptionally incompetent strategy.
The Americans will want to prove that the attack against Israel did not derail the peace process they crave.
In the moment, the Saudis now hold a much stronger geopolitical hand than they did just a few days ago. The Americans will want to prove that the attack against Israel did not derail the peace process they crave. The Saudis really want the defense guarantee, know they now have a better shot of getting from the Israelis some additional chits on Palestinian interests, are willing to float 1 to 2 million b/d of crude oil into world markets to “stabilize” balances, and were willing to acknowledge Israel anyway, which will frustrate their enemy, Iran, should it occur, but now under the formal protection of the US Fifth Fleet.
Strap in. We’re in the highest-stakes chess match. < MY TAKE: This is not a Short Term event. Hamas did a lot of damage and they killed a lot of innocent people. Irael will respond with a lot of force. Team Biden is crapping in their panties. Republicans will scream that none of this would have happened under Trump's watch. BTW we should get a new Speaker of the House this week.
We would add that copper futures sold off on the open in global futures markets but are now reversing to the upside as commodities are generally bid on the geopolitical shock.