The war between Hamas and Israel that erupted last weekend has caused confusion in the commodity investment sector, with funds rushing to divest stocks sensitive to turmoil in the Middle East but oil traders piling up into the world's most traded commodity.
Goldman Sachs analysts said in a note on Monday that hedge funds had been selling U.S. commodity-linked stocks at a faster-than-usual pace before the news broke that Hamas had entered Israel from multiple points. Once the news broke, attitudes changed, with oil jumping by more than $3 on Monday.
It was a short-lived rally, however. By today, prices had retreated while traders sought to gain some clarity about the future course of events in Israel. For now, one relevant implication of the latest events, according to media reports, is a delay in the normalization of relations between Riyadh and Tel Aviv.
The Saudis and the Israelis had been working on such a deal with the help of the United States, but now expectations are that it would take longer than initially planned. Another thing that would likely take longer would be Saudi Arabia's oil production cuts.
The change in the situation came literally a day after the Saudis reportedly said they were willing to roll back the cuts in a sign of goodwill to Washington. The report came from the Wall Street Journal, which cited unnamed officials from Saudi Arabia and the United States.
The deal would also involve U.S. sharing nuclear technology with Saudi Arabia-a controversial issue from several years ago when the Saudis asked for U.S. nuclear tech to build generation capabilities but were reluctant to sign up for all the requirements that such a deal would involve. Related: Chevron Shuts Down Israeli Natural Gas Field After Hamas Attack
Meanwhile, funds did not only sell oil-linked stocks before the start of the latest war. They also sold oil futures, Reuters' John Kemp reported on Monday. As usual, doubts about how long the latest price rally could last followed the initial surge in buying appetite, leading to net sales over the week of October 3.
In just two weeks, hedge funds sold the equivalent of 57 million barrels in oil and fuels after accumulating purchases of 398 million barrels over the previous 13 weeks. In the week to October 3 alone, sales totaled the equivalent of 33 million barrels.
Some observers were quick to note that the war premium had returned to oil markets, and it could rise further if the conflict spread regionally. There have been reports suggesting Iran was involved in the planning of the Hamas attack, with the most notable one coming from the Wall Street Journal and citing Hamas and Hezbollah sources.
The AP, however, reported a day later, also citing a Hamas official, that there was no Iranian or Hezbollah involvement in the planning of the attack. The Guardian, meanwhile, cited the Israeli army as saying there was no evidence of Iranian involvement in the attack.
"Iran is a major player but we can't yet say if it was involved in the planning or training," Rear Admiral Daniel Hagari from the Israeli Defence Forces said.
The United States has also stopped short of blaming Iran for helping plan the attacks, although Israel's president, Isaac Herzog, said over the weekend that Hamas was working for Iranian interests.
This may be a good sign, but things could change very quickly if any evidence emerges of Iranian involvement. That would prompt a response from Israel's ally, the United States, and the response will inevitably target Iran's oil industry with sanctions that might see a reversal in the recent production growth that the country has witnessed.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More