Oil, Gold Markets Swing From War Fears To Calm Over Israel-Iran Tensions: What Analysts Expect Next

The rapid shift in market sentiment from anticipating the onset of a new war to a state of relative calmness in the Middle East has been nothing short of remarkable.

Just last Saturday night, Iran launched an aerial attack involving nearly 300 drones and missiles on Israel. However, with the support of U.S. and European allies, Israel managed to neutralize 99% of the attack.

Following the incident, President Joe Biden cautioned Israel against retaliating towards Iran in order to prevent a larger-scale conflict. Thus far, the message has been received, albeit the Israeli war cabinet is currently convening to deliberate on how to respond to Iran.

As reported by the Times of Israel, Israel is leaning towards a retaliatory strike against Iran that is described as “painful,” yet cautious to avoid triggering a broader regional conflict. Additionally, the cabinet seeks a response that won’t face opposition from the U.S.

The CBOE Volatility Index (VIX) has dropped by nearly 6% as of 10:00 a.m. EDT, signaling a decrease in tension and anxiety across markets. This comes after the fear index surged by 16% on Friday due to the imminent threat of an Iranian attack on Israel.

Equities experienced a widespread rally as investors breathed a sigh of relief amid diminishing concerns about Israel’s potential counterattacks on Iran. The SPDR S&P 500 ETF Trust SPY rose 0.5% Monday, while European stocks, as tracked by the iShares MSCI Eurozone ETF EZU rallied 1%.

How Gold, Oil Reacted To Iran’s Attacks

Oil and gold prices, which were expected to benefit significantly from a broader conflict in the Middle East, experienced negative price action on Monday.

The United States Oil Fund USO, which tracks the performance of West Texas Intermediate (WTI) light crude, declined by 0.9%, suggesting that investors are not factoring in any significant disruptions to oil supply and demand.

Similarly, the SPDR Gold Trust GLD saw a decline of 0.5%, indicating a lack of widespread rush to gold, typically considered a safe haven during times of geopolitical stress.

What Do Analysts Expect?

Mohamed El-Erian, economic adviser at Allianz, highlights that this morning’s market dynamics, marked by lower oil prices, increased yields, and strengthened stocks, reflect two key factors: the absence of significant casualties and damage over the weekend, and a market sentiment indicating a reduced likelihood of further escalation in Iran-Israel tensions.

Macro advisor, Craig Shapiro suggests that high volatility was priced in ahead of the weekend, and “since WW3 didn’t break out yet,” there’s a subsequent selling of volatility, temporarily easing the pressure on high-risk assets.

Analysts at S&P Global caution that any retaliation by Israel, particularly if it includes targeting Iran’s oil facilities, will carry significant implications for energy markets.

Goldman Sachs’ commodity analyst, Daan Struyven, highlights that the potential Israeli response to Iran’s attack is shrouded in uncertainty, and this response will likely be the key determinant of the threat posed to regional oil supply. The expert believes that current oil prices already incorporate a risk premium of $5-10 per barrel due to potential supply disruptions.

Goldman Sachs considers the worst-case scenario to be the disruption of oil flows through the Strait of Hormuz, a critical passage through which approximately 17% of global oil production currently transits.

Although still deemed highly unlikely, such an eventuality would result in a 20% surge in oil prices within the first month, with the potential for prices to double if the interruption were to endure for several months.

Jason Britt, President of Central States Commodities, Inc., believes that the conflict between Iran and Israel is only in its early stages. According to his perspective, any sell-offs in gold, silver, crude oil, and other commodities will be brief.

“Gold rallied BEFORE the strike, and that’s because Iran gave Israel a 72 hour warning of the attack,” said Ross Norman, CEO of Metaldaily.com.

“All party sides come away with a win,” he added, as Iran can reclaim its pride, Israel gains broader international support and showcases its military prowess, the UK reaffirms its unwavering allegiance to the U.S., “while the US can declare itself the grown up in requesting restraint while seeking to regain some credibility in the Middle East.”

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