Oil prices slightly recover, but volatility remains in the Middle East

 

www.oilfutures.co.uk

Crude oil prices started falling on Monday as the markets opened for business, despite the extreme volatility in the Middle East that bordered on a major military conflict. 

At present, Iran - and its allies - and Israel are on the brink of a major confrontation, unless a face-saving move is made collectively; while reading between the lines it's clear that neither Iran nor Israel wants a protracted war with the corresponding archenemy; the stakes cannot be higher for the theocracy in the former, although both nations are democracies. 

The speculation was rife on Sunday about an imminent attack on Monday; Anthony Blinken, the Secretary of State of the US, said that he would expect some form of retaliation from Iran in the coming hours, without specifying the details; it was the US that said just after the Assassination of the political head of Hamas that Iran would carry out an attack in 24-72 hours.

By Sunday evening, the US said an attack by Iran and its proxies, notably Hezbollah from Lebanon, was imminent on Monday. It did not materialize either. 

Against this backdrop, the arrival of Sergei Shugoi, the former Russian defence minister and current head of the Security Council, in Iran led to intense speculation. Some analysts believe that the Iranians may have asked for more radar and air defence systems, especially in order to safeguard its nuclear facilities in the event of a major fight breaking out with Israel.  

With the presence of dozens of warships and spy planes, the US is in a position to scan the Iranian landscape to determine the preparation for a strike, if any, hours before, if not days: you cannot fire ballistic missiles and cruise missiles like firing bullets from a rifle or a machine gun; the movements of missiles and the launchers take time.

The job gets even more challenging, if GPS(Global Positioning System) signal jamming is in full swing in the areas that matter as far as the location of launching and the target are concerned: it's a disruptor of precision, to begin with; it involves interfering with  the signals that come from the satellites that are part of the GPS; by transmitting radio signals on the same frequencies as GPS, the move can overwhelm the GPS receiver and preventing it from accurately determining location, time, and speed;GPS is a critical component of modern missile systems, especially for precision-guided munitions.

It provides the missile with real-time location data, allowing it to navigate to its target with high accuracy; understandably, when the vital frequencies are tampered with, the missile loses its precision, finds it difficult to locate the target, exposes itself for countermeasures of a smart enemy and above all, can cause significant collateral damage.

The GPS consists of 31 operational satellites at present, orbiting an altitude of 20,200 km above the Earth. In order to determine the 3D location of a point on the planet - latitude, longitude and altitude -  a receiver, from a smartphone to a missile, just needs signals from at least four satellites - 3 satellites for the location in the form of latitude and longitude and one satellite for the elevation or altitude. 

In addition, GPS jamming is illegal in many countries under international law and in this context, practising it in war is a serious violation, due to numerous unintended consequences.

It is a fact that the US reiterated its iron-clad commitment to protect the Jewish state. In this context, as they did during the previous attack on April 13 by Iran against Israel, the US military may warn Israel against the imminent threat, hours before it actually takes place. Whether Israel will launch a pre-emptive strike or choose to be a sitting duck in the presence of grave danger, remains to be seen, though.

As far as oil price concerned, the fall of crude oil price, in this context, is highly unprecedented, because, in the past, even a  terrorist incident, not necessary a major attack, used to push the oil prices up substantially; the trend does not exit anymore!

The development emerged in the wake of the latest economic data:there are fears over the US, world's largest economy, falling into recession; the values of bitcoin and stocks have started falling, recording the worst losses on Monday, since the outbreak of the pandemic . Even entrepreneurs like Elon Musk and a few more say a cut in interest rate in the current circumstances is something long overdue.

The other serious worry that keeps investors and traders cautious is the Chinese manufacturing sector that has contracted slightly in July. Weak manufacturing results in the loss of demand for oil and gas.

Since April this year, China's manufacturing PMI, the key indicator of the manufacturing activity in the world's second largest economy, has been below the threshold of 50% - a signal of contraction in the sector. Oil producers pin their hopes on China's strong manufacturing activity so that they can get that their future investment strategies right; at present, it remains illusive, though.

In another development, Arab media reports that the profift of Saudi Aramco, the oil giant, has fallen by 3.4% in Q2, due to lower crude volumes and refinery margins; this may be the reason behind the decision by the Saudis to increase the price of Arab light crude oil to Asia as a way of compensating for the losses to some extent.

According to some analysts, had it not been for the evolving military scenarios in the Middle East, the fall of oil prices would have been far worse than what we witnessed on Friday that went on to continue on Monday.

In these circumstances, all eyes are  on the Middle East to see whether the volatility would subside when heightened emotions just die down. 

My instinct tells me that even if there is an attack against Israel, it would not lead to a serious escalation and be more of a measure taken to allay the fears - or even appease a particular section of the Iranian society rather than inflicting a heavy damage to the enemy in question. It does not mean the end of the mutual hostilities and volatility in the region, though.