Nifty to add gains or fall in trade? Here are 10 things to know before market opens

What Has Changed?

A lot has changed in the half century since the Yom Kippur war. Middle East adversaries seem to be exhausted of fighting each other. Israeli PM Benjamin Netanyahu flew into Oman unannounced and had tea with Sultan Qaboos at his palace on 26 October 2018. That set the ball rolling for détente between Israel and Arab leaders. Israel now has diplomatic relations with the UAE and is in advanced negotiations for reopening embassies in Saudi Arabia. Iran and Saudi Arabia have been traditional adversaries but are now warming up towards each other. Peace brings prosperity. In the oil business, it brings lower oil prices. Wars in the Middle East are funded by oil exporters raising prices. Peace means lower inflation and better quality of life for citizens.

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Oil Price Risk

Any prolonged conflict in the Middle East can derail the peace process, and push oil prices higher. Oil prices can rise due to multiple reasons – supply disruptions, attacks on oil infrastructure (especially pipelines), hoarding by nervous buyers, price gouging by sellers being primary triggers. History has shown wars in the Gaza and Palestine areas have been short lived. If history repeats itself and the fighting ends in a fortnight or so, oil prices may rise initially and settle lower again. A longer war means oil prices may get pushed higher. Oil traders know that oil prices reflect four types of premium built into them – terror, geopolitical, demand/supply and speculative. Initially terror and geopolitical premium may rise as the markets open on Monday. Thereafter they will react to news originating from Gaza. Over time, nerves will calm down and prices may get less volatile.

As a trader what I would watch keenly are the bid/offer spreads. These are price limits of buyers and sellers’ quotes on trading terminals. While buyers will want to buy at lower prices, sellers will want higher prices so their price limits will differ. This difference is called the horizontal spread. The difference in price limits of the first, second and third buyer (or seller) is called the vertical spread or impact cost. It is natural that initial reactions of the markets will be knee jerk and spreads will be wide. Very wide spreads indicate fear and reluctance to trade. If spreads narrow back to routine levels, all is well.

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