Israel's attack on Gaza has a lot people wondering whether or not their aggressive move is a prequel for an Iranian attack.  An Iranian attack would send oil prices souring as Iran's only immediate line of defense would be to blame the United States and disrupt ships that go through the Persian Gulf.

Indeed, with light trading in crude oil futures and after hitting new lows last week, it seems like a good time for oil exchange traded funds like USO and OIL to stage major comebacks.  But with light volume trading, it also may very much be the case that traders are getting ahead of themselves with speculation of oil disruptions.  Oil demand has clearly declined, as most analysts agree that supplies have risen substantially.  There were 207.3 million barrels of U.S.  gasoline stockpiles on the week ending December 19, as most analysts agree that number will rise.

The long term oil buyer's bet assumes that oil is undervalued, given historical values and given comparisons to other commodities.  But long term buyers are scarce these days, and one has to assume that today's catalyst are those who expect an attack on Iran.  Traders at Intrade, a popular futures political exchange market, only give a 7% chance that Israel and/or the U.S. will attack Iran in the next few months.

If Israel were to attack Iran with or without U.S. support, Iran's primary way of dealing with that would be to try to close off the Persian Gulf and increase support and funding to groups like Hezbollah in Lebanon, who will probably in turn attack Israel as they did in 2006. Iran would also provide support for militant Shiite groups in Iraq.

Traders would be smart to consider the arrogance of Iranian leaders.  The reason why Iran is so arrogant with what they say is that it would be very difficult for Israel to pull off an attack on Iran without a U.S. ground invasion that topples the government. Hezbollah actually surprised the world in 2006 by not surrendering to Israel in a month long war that ended in a cease fire. The reason was simple: unlike Hamas in a place like Gaza, Hezbollah operates in mountainous regions, which are very difficult to invade.  Mountainous places like Lebanon, Afghanistan, Pakistan and Iran are much much more difficult to deal with than flat areas like Iraq. You can never really 'win' in a mountainous area, according to most military experts. So an attack on Iran by Israel would above all else potentially open them up to a drawn out and difficult conflict with Hezbollah.

From a geopolitical perspective, the Iraq war has increased Iran's power and ruined a perfectly good idea - a major attack on Iran that would try to topple their religious government. Iran, unlike Iraq, has no significant factions aside from the fanatic religious versus non religious. Like the Kurds in northern Iraq, Iranians would fold immediately and welcome democracy. But the Bush administration has been so humiliated and bogged down in Iraq that they seem no longer ready to take any more risks. So they have actually empowered the Iranian leaders. And the irony is that the Israeli lobby in the U.S. pushed the failed Iraq policy in the first place - so it's pie in the face all around.

It is in this writer's opinion that the U.S. (not Israel) can and should attack Iran, not just to destroy their nuclear program but to try to topple that government.  But I find that highly unlikely after the mess made in Iraq.  An Israeli attack, I find to be even more unlikely, given that it would make Israel more vulnerable, not less.  Short term oil traders, beware the Iranian conflict speculation.