Oil And Middle East Conflict

It has been extremely tough this time around trying to find a “time line” on the events. Often is the case that a small trickle turns into a torrent when assertions need to be made, only to resort back to a trickle when the dust settles. This is what we believe has occurred. However, before we go into this we will provide a quick summary of what is occurring in the region. In the map above you can see the two grey areas, the Gaza strip and West Bank regions that have been under the rule of the Palestinian National Assembly (PNA) as a result of the Oslo accord between the Israel and Palestinian Liberation Arm (PLO). This was put in place to help solve the conflict between the two. It was an interim step for five years, however as of today the problems have still not been solved.

To compound the issue, in Gaza in 2007 the militant Hamas party in a bloody coup expelled the more moderate Fatah party. This left Palestine divided: the Gaza Strip was run by the outlawed Hamas, and the West Bank was run by Fatah, however Israel still controlled both. As a result of the coup Israel and Egypt imposed a sea, air and land blockade on Gaza in retaliation. This provides the basis for the conflict: Israelis looking to regain control of the territories and to inhibit the ability of militants in Gaza lobbing bombs on Israeli cities; whilst Palestinians are looking for the blockade and sanctions to be removed. It appears that in a move for solidarity as of today both Fatah and Hamas have reunited in support against the attacks from Israel. This is where it becomes interesting, as the situation could spiral out of control and we still do not have an accurate read on who the aggressor was who started it.

In this case we will probably not get a clear picture on who initiated the current conflict, rather each side will see this as an opportunity to flex its muscles/ military power in the region, looking for some form of gain. Initially the machinations between Gaza, West Bank and Israel should be contained however, when you look at the region, escalating the conflict may also have its benefits. 

In this case we feel that Israel, which has been “sabre rattling “ for some time, is looking to prove a point. The Jewish state, surrounded by Islamic countries, is looking to exert its military capability. To the north west is Syria, (which has its own troubles) and the Israelis claim that Iran is offering military aid to the Syrian Government. Tensions between Iran and Israel continue to remain elevated, with Israel declaring the use of military force against Iran if it does not declare its hand on its nuclear capabilities. Then to the west we have Jordan, which is the heart of the Arabic Islamic Empire. The King of Jordan has been entertaining Hamas as his powers become more entrenched in the region, which for Israel is a concern. Then to the south we have Egypt, which is still living through the “Arab spring”. Israel’s, voice in the region is not as strong as it used to be, with power bases in the Middle East constantly shifting. The current conflict provides the basis for Israel to show off its capabilities. Let's hope we are seeing no more then sabre rattling, albeit with just a little more aggression.

On the flip side, Hamas Leaders in Gaza are looking to other Islamic states to provide support not just for Gaza but also to join an effort to plug the Islamic cause in the region. It’s a fine line between defense and provocation, and it appears both sides are guilty of provocation.

The volatility in Middle Eastern oil premium continues to be built into the price and we have already seen some wide swings. The dispute should be localized to Israel and the occupied territories, however the very fact that Israel sits alone surrounded by Islamic states suggests a wider issue. Traders are concerned that this conflict potentially has a wider reach which could have implications for oil producers in the region, as they sell oil to the West, and implications for Iran and hence the supply of oil through one of the major oil choke points, the Straits of Hormuz, through which 35% of sea borne oil passes. Seaborne oil accounts for 50% of the 87 million bpd required to feed the global economy.

So in conclusion, the key we see to this conflict developing is in how far each participant is willing to go. Israel is amassing troops on the boarder and continues its bombardment of Gaza. Hamas and Fatah have united and are presenting a common front, whilst keeping up appearances with rocket attacks. Palestine has offered a “olive branch”. So another round of intense negotiations will begin. If we see foot soldiers used in the conflict then we feel it has reached a new phase and this to us is the concern. At the moment lets hope the conflicts can be solved as firstly the world does not want to see another war and secondly the worlds economies simply cannot handle oil prices above US100.00.

[Israel and Hamas have agreed to a ceasefire beginning 6am Sydney time – Ed]

Chart Point:

We can see that the oil price (WTI) has concluded its range of US85.00 is on the lower end and US95.00 is the top. We continue to see it trading this range and as mentioned last week feel that the market to hold US85.00 after all the negative news suggest the support is solid. Momentum indicators on both a daily and weekly basis look good and pointing higher. We have been long for a while and looking for areas to add to out position.

Daily