The Hamas Attack on Israel and the Risks Ahead

October 09, 2023

The tragic attack on Israel this weekend by the Hamas militant group in Gaza was an act of barbaric terrorism that has left hundreds of Israelis dead, but (by itself) is unlikely to lead to skyrocketing oil prices, a severe recession, and a stock market crash as the Yom Kippur War did 50 years ago.

This isn't to say there aren't risks ahead. There are, as described below. We will monitor the events closely as they play out in the weeks ahead and adjust our strategies accordingly.

However, in recent years, these kinds of events have seen an initial reaction of higher oil prices followed by a significant decline:

  • The Aug 1990 Iraqi Invasion of Kuwait saw a subsequent 58% drop in oil prices from Nov-90 to Mar-91.
  • The 9/11 US attacks on the World Trade Centers and Pentagon saw a 43% drop in oil prices from Oct 2001-Dec 2001.
  • The Aug 2006 Lebanon War saw a 37% subsequent drop in oil prices from Aug 2006 to Feb 2007.

So far, West Texas Intermediate crude oil prices have only risen $3.45 per barrel to $86.24, while the S&P 500 Index is higher by 25 points on the day, to 4,335.

Key Points:

1. The initial "knee-jerk" reaction by markets has been higher oil prices and oil stocks (VGA is currently overweight energy), a decline in most other stocks, and a fear trade into US Government bonds (due to fears of an "oil shock" recession, escalation of Middle East war)

2. One positive difference now vs. 50 years ago when the Yom Kippur War occurred is that Israel and Saudi Arabia were very close to signing a peace deal before this attack happened. The attack was intended, in part, to derail that deal and was timed to the 50th anniversary of the Yom Kippur War, fought in October 1973 between Israel and a coalition of Arab states led by Syria and Egypt. The Arab Oil embargo that followed the Yom Kippur War had the support of Saudi Arabia and led to a quadrupling of oil prices, a severe US recession, and the 1973-74 US stock market crash (a total decline of 48%).

3. Over the weeks ahead, a key issue will be if this conflict escalates to include Iran (rumored to have funded and helped organize the attack). If so, President Biden will be pressured to reinforce oil sanctions on Iran. Iran is back to producing 3.1 million barrels per day (mmb/d), up from a low of 1.9 mmb/d in Aug-2020 following President Trump's withdrawal from the Iran nuclear deal and re-instatement of sanctions in 2018.

4. Positively, Saudi Arabia has three mmb/d of shut-in oil production capacity AND has shown the willingness in recent years to add oil supply to the market to reduce upside price volatility around events like this. For example, in the months following the 9/11 attacks, Saudi Arabia increased its oil production by over 30% or 2.2 mmb/d.

5. While there is a risk that the conflict will escalate and lead to a broader Middle East conflict, the current backdrop is different than 50 years ago in that Saudi Arabia has shown the willingness to add supply to the market and the shale revolution in the US has resulted in another major source of global oil supply. For example, US oil production has more than doubled to its current level of 12.9 mmb/d vs. only 5.7 mmb/d in 2001 when the 9/11 attacks occurred.

6. The US Strategic Petroleum Reserve (SPR) has become more politicized in recent years, and additional supply could also come from it over the weeks ahead should oil prices exceed $100 per barrel.

7. The attack was also rumored to have had the support of Russia since it draws attention away from its war in Ukraine. A second-order risk is that it may embolden China and North Korea in their territorial ambitions (Taiwan, S. Korea, etc.), especially as our government is distracted by electing a new House Speaker.

We will closely monitor the events in the weeks ahead and follow the message from our key indicators and models. Still, historically, these events have proven to eventually provide buying opportunities.

*All data sourced through Bloomberg.

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