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Markets ignore rumors of war

Sam Fletcher
Senior Writer

There was virtually no reaction in world oil markets when Iran denied the rumor that Israeli aircraft had attacked its nuclear facilities on June 23, saying such an act would be "impossible."

Normally tales of a possible war in the Middle East provoke a collective knee-jerk reaction from energy traders in fear of supply disruptions. When Israel's Transport Minister Shaul Mofaz earlier said Israel would mount such an attack if Iran continues its program for developing nuclear weapons, benchmark US light, sweet crudes shot to a then record intraday high of $139.12/bbl before closing at a record $134.54/bbl June 6 on the New York Mercantile Exchange, up a whopping $10.75 in the biggest 1-day gain ever at that point.

Oil price records were plentiful in June. As the US dollar fell, the August contract for benchmark US light, sweet crudes hit an intraday high of $140.39/bbl June 26 on the New York Mercantile Exchange, then closed at a record $139.64/bbl. Despite huge intraday swings, however, prices were held around $135/bbl for most of the month.

Crude prices climbed in early trading June 20 following reports that Israel's large military exercise in the eastern Mediterranean was really practice for a potential bombing attack on Iran's nuclear plants. Yet subsequent talk of an actual attack by bombers failed to generate any buzz at all.

"We had not heard the rumor before it was on the screen, and we still wonder if there was ever a rumor given the market's lack of price action," said Olivier Jakob at Petromatrix, Zug, Switzerland. "Israel has taken great care to publicize its 'Glorious Spartan' military exercise over the Mediterranean between May 28 and June 12, and we have to wonder where this rumor of an attack on Iran started from."

Israelis train
Under Glorious Spartan, more than 100 Israeli fighters together with bombers and rescue helicopters reportedly trained with the Greek air force over the Mediterranean, replicating the flying distance and mid-air refueling necessary for a flight from Israel to Iran. Maneuvers reportedly included low flying over mountainous terrain, a mock attack on a well-defended airbase in Greece, and practice with live ammunition at a nearby firing range for aircraft.

Jakob said, "There is definitely some psychological warfare going on, but turning to the operational realities we note that the Olympics run Aug. 8-24 and is followed by Ramadan Sept. 1-30." Ramadan is one of the most holy Muslim religious observances.

An Israeli air raid would need approval from the US military to penetrate Iraqi air space to reach Iran. "We would give little chance of a US nod for an attack during the Olympics; Israel might not care about striking during Ramadan," Jakob said. "Any attack during that timeframe would expose US troops in the [Persian] Gulf to greater grievance and risk."

Moreover, the US Navy had only one carrier, the USS Lincoln, in the Gulf in late June. "Carrier deployment plans have been disturbed by a fire on the USS George Washington on its voyage from Norfolk, [Va.,] to the East Pacific, forcing it to stop in San Diego for repairs until August. The USS Reagan is stationed near Hong Kong and unless it was to sail to the Gulf we will view the possibility of air bombardment on Iran not an immediate reality," Jakob said at that time.

However, John Bolton, former US ambassador to the United Nations and an advocate of hard line foreign and defense policies who is influential among conservative Republicans, said he expects Israel will likely to attack Iran sometime "between the November presidential election in the US and the inauguration of the new president." Bolton was US representative to the UN August 2005-December 2006 on a recess appointment. He is now counsel to the law firm Kirkland & Ellis in Washington, DC.

Mohamed ElBaradei, director general of the International Atomic Energy Agency under the UN, claims an attack on Iran would turn the Middle East into "a fireball." He threatened to resign his office if there is an attack.

Meanwhile, the European Union imposed new sanctions on Iran, curbing travel for certain Iranians and freezing some banking assets. "The carrot and the stick approach continues as on the same day the US administration leaked to the press that it was debating opening a US diplomatic interest section in Teheran. In order to do this without the administration appearing to the public as capitulating would probably need to be accompanied by another toughening of sanctions," Jakob said.

(Online June 30, 2008; author's e-mail: samf@ogjonline.com)


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