Despite the Middle East conflict, investors are not alarmed

Neither the oil nor the stock markets have been affected by the Middle East conflict

Will there be peace?

Averted oil shock? The protracted Iran-Israel conflict has escalated over the past two weeks, causing anxiety among world leaders and commodity traders. When the US directly entered the war over the weekend and dropped terrifying bunker-buster bombs on three Iranian nuclear facilities, things reached a breaking point.

According to Simon Nixon on Substack, the widespread belief that Donald Trump is a "chicken"or, as traders say, "Trump Always Chickens Out"was disproved by that dramatic escalation. Few geopolitical events actually affect markets in a significant way. The oil crisis of the 1970s and Russia's invasion of Ukraine in 2022, however, had disastrous economic repercussions.

The reply was "very weak."

The reddest of red lines in Tehran had been crossed by American B-2 Spirit bombers. The world anxiously anticipated its answer. The narrow waterway that transports about 30% of the world's seaborne oil, the Strait of Hormuz, was set to be closed by the Iranian parliament, which merely serves as an advisory body. According to analysts, this kind of situation might cause oil prices to skyrocket above £100 per barrel.

Monday ended up being a pivotal day. The strait was not closed by Tehran. It instead telegraphed a face-saving de-escalation that Trump called "very weak" in advance by firing missiles on a nearly deserted American base in Qatar. By Tuesday night, it seemed that a tenuous ceasefire had been established.

According to Malcolm Moore, George Steer, and Jamie Smyth of the Financial Times, Brent crude started to decline "within seven minutes" of the initial Iranian strikes in Qatar. The price had decreased by more than 7% in just two hours. Merchants, however, had "rightly concluded that the attacks would reduce, rather than heighten, tensions" despite the spectacle of flying missiles. The United States had evacuated aircraft from the air base days prior, according to satellite images. According to Onyx Capital's Jorge Montepeque, "it is all orchestrated, we know the base is empty."

With the decline in the Iran risk premium, Brent crude oil prices fell almost 13 percent on Monday and Tuesday, closing below £68 per barrel. The Americas SandP 500 surged to within 1% of its February record high as global stock markets recovered.

Gavekal Research's Tom Holland and Tom Miller speculate that the risk that Iran would actually face in closing Hormuz may have always been exaggerated. A closure of Hormuz would not primarily affect America. Nowadays, the majority of the oil that passes through the strait travels to Asia in the east. "Roughly half of China's oil imports come from this region." More than its adversaries, Iran's friends would suffer if Hormuz were closed.

The oil glut is coming.

According to Bloomberg's Javier Blas, an Israeli strike on Iran's nuclear program was considered the ultimate oil market tail risk only a few years ago. Analysts predicted that oil would reach its all-time high of £147 per barrel or perhaps surpass £200 per barrel for the first time. The emergence of US shale, however, has changed the energy markets. In spite of all the "hysteria" surrounding Hormuz, it appears that the world is about to experience a surge in oil supply. Iran's own production is expected to reach "a fresh seven-year high" this month, which is an incredible accomplishment considering the country has been bombed for the past two weeks. Opec producers have increased their production quotas.

It is important to keep in mind that oil continued to flow almost unhindered throughout the first and second Gulf Wars, and that the conclusion of both wars resulted in a new surge in supply. Oil prices may be about to drop "quite a lot" if history is any indication.

Global power politics have changed as a result of the US shale revolution, according to Ambrose Evans-Pritchard in The Telegraph. The addition of "a new North Sea every three years" is what American frackers have been doing. The nation currently holds the title of "by far the largest combined producer of oil, petroleum products, and natural gas" worldwide.

Because they were afraid of starting an oil crisis, previous US administrations refrained from attacking Iran. Because of shale, the leaders of the nation now have the energy independence to put a lot more pressure on Iranian leader Ayatollah Ali Khamenei than they did in the past. "Trump's political triumph is undeniably spectacular.

Peace, but a pause.

The Economist claims that Benjamin Netanyahu, the prime minister of Israel, has also achieved a "dazzling, daunting, dangerous victory." This is still a "moment of triumph" even though a furious Trump publicly pressured him to stop Tuesday's strikes on Iran. Beginning on October 7, 2023, Israel, a country of ten million people, has achieved "air superiority over much of the Middle East" and defeated its most formidable adversaries in a multifront conflict.

According to David Wainer of The Wall Street Journal, investors have taken notice of the geopolitical change. Over the past month, the Israeli TA-125 share index has risen 11.5 percent, outperforming the global average. Despite the barrage of ballistic missiles that hit Tel Aviv and Haifa last week, it recorded five consecutive daily gains.

What is the reason for the euphoria? It seems that the "risk premium" for investing in Israel is decreasing as the threats posed by Iran and Hezbollah are lessened. That might promote increased foreign inward investment. However, there are still dangers, such as the possibility of an Iranian regime choosing to speed up its nuclear program and "international opprobrium" due to the unresolved Palestinian conflict.

Marc Champion at Bloomberg says that future events are still uncertain. Israel has accomplished its primary military goals, and the current ceasefire should hold. Will the humiliated Iranian regime survive? Will it speed up its nuclear program to deter future attacks? "There will not be a permanent peace between Israel and the Islamic Republic," however.