Risk level: Blue - Guarded

RED: Severe (+/- 4%) ORANGE: High (+/- 2%)  YELLOW: Elevated (+/- 1%)  BLUE: Guarded (+/- ½%)

 The U.S. decision on the Iranian nuclear deal may eventually be seen as the flame that lit the fuse on the powder keg in the Middle East. With investor nerves tested by geopolitical risk, Brent crude jumped more than 3 percent to make a run at $80 after the May 8 decision from President Trump on the JCPOA, but cooled off in the remaining sessions. We were only slightly aggressive with our Orange alert last week, with crude oil prices rallying 1.25 percent to close Friday at $77.12 per barrel. With Israel launching one of its largest strikes on Syria since the 1973 Arab–Israeli War, we see markets primed to test new levels, albeit rather slowly.

The Israeli military followed Trump's decision to leave the P5+1 agreement with one of its largest strikes on Syria in decades, pounding Iranian military installations near the Damascus airport. In response, Iran's Ayatollah Ahmad Khatami said during Friday prayers that Israel could become sleepless by "the nightmare" of Iranian missiles should it do "anything foolish."

Turning points in history tend to follow conflict break outs among rivals and it's these conflicts that move history in unchartered directions. As we have anticipated, the U.S. decision to leave the Iranian agreement was another sign of hegemonic decline, with its European allies openly wondering about the end of Pax Americana. With Trump staking his legacy on Korean negotiations, Israel is now unleashed to settle its scores. French President Emmanuel Macron is already calling for de-escalation, after finding the U.S. president unfazed by cajoling. And by Friday, it was Iran that resumed the effort to play the responsible actor by saying silence from the international community only encourages Israeli aggression. It seems the U.S. voice is losing its clout. Could isolation diminish U.S. economic influence as well?

The international relations theorist Kenneth Waltz, and others, warned that it's always possible that non-military issues turn into military ones and force may be used to solve them. He also said the use of force signals a breakdown in order. The 1973 Arab–Israeli War brought the two superpowers, the United States and Soviet Union, into a proxy battle in the region and the conflict today bears a striking resemblance to that breakdown in order. Between July 1973 and January 1974, and during the subsequent Arab oil embargo, crude oil prices nearly doubled.  Citing geopolitical tensions and risks from supply disruptions in Iran and Venezuela, the U.S. Energy Information Administration raised its forecast for Brent by $7 per barrel from its April forecast. And that revision was made before Trump's announcement on JCPOA.

The recent escalation in Syria may be a minor tremor amid multipolar muscle-flexing. But trading into a geopolitical storm takes some degree of backbone that may be foolhardy should Iran maneuver through sanctions. Already, there's a 180-day window to work with and European leaders have said they're interested in sanctions busters. U.S. oil, meanwhile, could in theory bridge the Iranian gap, but in recent weeks, potential clients in the Asian economies bracing for a trade war have shown little appetite for light, sweet crude. While talk of a return to $100 barrel oil makes good headlines, we're less bullish, seeing oil range bound while the new phase of geopolitical tensions play out.

We're issuing a Blue alert this week, expecting crude oil prices to move by about a half percent for the week.