By Cyril Widdershoven of OilPrice.com
Israel is on the brink of a full invasion of the Gaza Strip, with the Israeli Armed Forces (IDF) prepared to implement a range of military strategies. While regional tensions are escalating, a full-scale war has not yet erupted on Israel's northern borders with Lebanon and Syria, involving Hezbollah, a Shia terrorist organization, and its supporters. Diplomatic pressure from the USA and Arab nations is currently preventing Hezbollah from launching a large-scale offensive. This ongoing 'stalemate' is precarious, as it has the potential to trigger a regional conflict and create significant instability in Arab countries, such as Egypt, Jordan, and Saudi Arabia, which could face public backlash. Despite the concerns within the oil and gas market about the ongoing conflict and its potential impact on energy supplies and operations, the expected oil price risk premium remains relatively low. The situation appears uncertain, but even Saudi Crown Prince Mohammed bin Salman's Davos in the Desert FII2023 conference proceeds as if the crisis is not occurring. Energy industry leaders are mingling in opulent settings at Riyadh's Ritz Carlton, seemingly disconnected from the reality on the ground.
Just as political leaders in the West often struggle to understand the sentiments of their constituents, leading to the rise of populism, it appears that energy giants, OPEC leaders, and commodity traders are similarly detached from the unfolding crisis. The situation bears a striking resemblance to the Russian military buildup on Ukraine's borders in 2022 when most believed that nothing significant would happen.
From a military geopolitical perspective, the current alertness of Western forces, including the USA and Israel, is unparalleled. While all eyes are on the IDF and its neighbors, the significant buildup of US forces in the region is being concealed from public view. The only noticeable change in posture is the preparations made by Washington to safeguard US civilians and diplomats from becoming embroiled in the conflict. However, the hidden buildup of US Navy force projection capabilities, the deployment of advanced anti-missile systems, fighter squadrons, and an offensive capacity to target any regional adversary is unprecedented. Officially, Washington attributes these military moves and preparations to protecting US troops in the Middle East, given the increased attacks on their assets by Iran-backed militants in Iraq and Syria. However, it is evident that the focus extends beyond force protection.
Since the Hamas terrorist attack on Israel, US forces in the Middle East have been repeatedly targeted by missiles, drones, and rockets in Iraq, Syria, and even in response to Yemen-based missile launches in the Red Sea region. All these attacks have been linked to Iranian-backed operations. Washington's recent call for US citizens to evacuate Lebanon and other Arab capitals should not be underestimated. There are clear signs that a direct military confrontation between the USA and Hezbollah, Syria, and Iran is imminent. The positioning of two US aircraft carriers off the coast of Israel, alongside the existing US fleet in and around the Arabian/Persian Gulf, underscores the seriousness of the situation. A ground assault by Israel on Gaza or heightened Hezbollah activity in northern Israel could easily trigger a larger conflict.
Oil markets, commodity traders, investment funds, and maritime companies should reevaluate their strategies promptly. While building a military capability to project power is generally a defensive move that should be welcomed, the current actions indicate a shift from defensive to offensive postures. Unless a miracle occurs in the coming hours or days, a higher level of volatility and confrontation than what the mainstream media or analysts are portraying seems imminent. One significant incident, even initiated by a minor player like Hezbollah or Iranian-backed militias resulting in US casualties, could trigger a major crisis. Iran's military capabilities, especially its missiles and proxy forces, are formidable, and the outcome of a full-scale confrontation would be definitive.
In such a multifaceted conflict, the implications are extensive, encompassing the Eastern Mediterranean, the Suez Canal, the Red Sea, and the Persian Gulf. These regions are vital maritime transport routes for energy, commodities, and nearly half of global maritime trade. The costs of such a conflict would be staggering, jeopardizing future assessments and investments. History provides valuable lessons, even for algorithm-based commodity traders and investors, and the situation evokes memories of the Ukrainian crisis, but this time, the involved powers possess far greater capacity and reach. It is essential not to underestimate the global influence of Iran, which has a presence around the world, including in the USA, UK, and EU, in addition to its significant naval and IRGC capabilities. Moscow, while not overtly involved, should not be overlooked as a silent partner in the unfolding events.