Israeli air strikes into Syria over the weekend caused a spike in crude oil prices when the futures opened on Sunday night. While neither Israel or Syria are relevant for the global oil market, traders viewed the news as increasing the risk for a potential wider conflict, as the “shadow conflict” with Iran escalates through these attacks.
While the attacks are certainly bad news, what about the impact on the oil market? I can’t remember how many times I’ve heard fellow traders tell me about a potentially “huge” oil spike that was likely to happen because of renewed conflict in the Middle East. In fact, it might be the most rumored event to never happen in my time as a trader. It’s appealing to the “plugged-in” crowd of traders who feel more secure and clever by following every country in the world’s politics, economics, and social situation for the first inkling of a trade. But most of the time, it’s just noise. The vast, vast majority of the time, there is no trade, no matter how juicy the headline.
Even tonight’s overnight action in crude oil has been quite puny given the attacks. The initial move higher from Friday’s close (green arrow) has mostly faded, and oil is now only up 0.5%:
Some might argue that oil was already up 5% on Thursday and Friday, somewhat pricing in the move. But I would argue that global risk appetite is, and has been, a much more important driver of oil prices than geopolitical flareups for years now. The S&P 500 making all-time highs is much more important for oil prices than developments in Syria.
In rare cases, like Abe’s election in Japan in November, the news is actually a market-changing event. In those cases, the market is usually slow in pricing in the significance of the news. This can happen in single stock stories as well. TSLA is a good recent example. When it announced that it was likely to make its first quarterly profit, the stock moved 16% higher on April 1st on massive volume (circled in green):
But the stock did not really take off for another week. (It actually sold off 7% on April 3rd because of some “news” about TSLA’s financing for customers – a case of total noise.) The improved earnings outlook was real news, and it actually mattered.
Again though, that’s the rare case. The VAST majority of news events are irrelevant to future prices of an asset. It’s one reason why we lean towards selling volatility ahead of earnings events as traders get excited about a big move into the event. But especially on a macro basis, where there are so many moving parts affecting economic actors across the globe, the news hardly matters. Even a “massive” jobs report like we saw on Friday.