Conventional wisdom says that an Israeli – or American – attack on Iran’s nuclear facilities would trigger an extraordinary oil price rally. The $200-a-barrel Armageddon scenario comes straight to mind.
But what if oil prices failed to rally or, worse for the bulls, actually plunged?
Colin Fenton, who heads commodities research at JPMorgan, has just released a note to clients warning to expect the unexpected.
“If an attack occurred, we would not be surprised if the initial impulse were a smaller-than-expected and briefer-than-expected oil price spike followed by a stronger-than-expected oil price decline,” he wrote.
The bearish outcome is counter-intuitive, but the history of the oil market and the Middle East suggest Mr Fenton could be right.
He explains that first, western countries could order a massive release of their strategic oil reserves even if there was no supply disruption; and second, an attack could damage global confidence, weakening economic growth and thus oil demand.
I would add a third reason: depending on the scale and nature of the attack, Iran may choose not to retaliate – or even acknowledge the attack happened at all.
The use of strategic oil reserves is the most obvious reason behind a potential fall in prices. The biggest one-day drop in oil prices occurred on January 17 1991 as the US started dropping bombs on Saddam Hussein’s troops in Iraq and Kuwait. The $10.90 a barrel price collapse was the result of the International Energy Agency ordering the release of the strategic reserves that day.
The terrorist attacks of September 11 2001 also offer historical lessons about how the global economy could suffer such confidence damage. Immediately after the attack, oil prices surged nearly 5 per cent as traders bet, correctly, about a link with al-Qaeda and the Middle East. But as the wider economic repercussion of the terror attacks became obvious, prices fell. Three months after September 11, oil prices were 25 per cent lower.
The politics of the Middle East could also prevent an oil price rally. When Israel destroyed Iraq’s nuclear programme, bombing the Osirak nuclear centre south-east of Baghdad in 1981, Saddam Hussein reacted with an outburst of verbal threats. But he never followed through militarily. The limited nature of the attack – and the potential of a major war – probably called for restraint. Oil prices did not move.
When Israel bombed a suspected nuclear installation in Syria in September 2007, Damascus and the Israelis kept silent about the secret operation. Syria never responded to the attack. The oil market only learnt about the incident weeks later. Prices barely moved.
The politics and oil price implications of any Israeli attack on Iran would certainly differ from the previous examples. But the history of the Middle East and the oil market should serve caution against jumping on the bulls’ bandwagon.
The Commodities Note is a daily online commentary on the industry from the Financial Times