In a surprising turn of events, market sentiment on commodities has shifted from anticipating war to a state of relative calmness in the Middle East. Contrary to expectations, both oil and gold prices experienced negative movements, reflecting the diminishing concerns about the potential for a broader conflict.

The rapid shift in market sentiment came after Iran launched an aerial attack involving nearly 300 drones and missiles on Israel last Saturday night. However, Israel managed to neutralize 99% of the attack with the support of U.S. and European allies. President Joe Biden cautioned Israel against retaliating, aiming to prevent a larger-scale conflict.

Although the Israeli war cabinet is currently convening to deliberate on a response to Iran, Israel is leaning towards a retaliatory strike described as "painful" but cautious in order to avoid triggering a broader regional conflict. The cabinet seeks a response that won't face opposition from the U.S.

The calming of tensions is reflected in the CBOE Volatility Index (VIX), which dropped by nearly 6% as of 10:00 a.m. EDT. This decline indicates a decrease in tension and anxiety across markets, following a 16% surge in the fear index on Friday due to the imminent threat of an Iranian attack on Israel.

Investors breathed a sigh of relief amid diminishing concerns about Israel's potential counterattacks on Iran, leading to a widespread rally in equities. The SPDR S&P 500 ETF Trust rose 0.5% on Monday, while European stocks, as tracked by the iShares MSCI Eurozone ETF, rallied 1%.

However, the expected beneficiaries of a broader conflict in the Middle East, such as oil and gold prices, experienced negative price actions on Monday. The United States Oil Fund, which tracks the performance of West Texas Intermediate (WTI) light crude, declined by 0.9%, suggesting that investors are not factoring in significant disruptions to oil supply and demand. Similarly, the SPDR Gold Trust saw a decline of 0.5%, indicating a lack of widespread rush to gold, typically considered a safe haven during times of geopolitical stress.

Analysts attribute the market dynamics to two key factors: the absence of significant casualties and damage over the weekend, and a market sentiment indicating a reduced likelihood of further escalation in Iran-Israel tensions. These factors have led to a temporary easing of pressure on high-risk assets, resulting in lower oil prices, increased yields, and strengthened stocks.

Despite the relative calmness, analysts caution that any retaliation by Israel, particularly if it includes targeting Iran's oil facilities, will have significant implications for energy markets. The potential disruption of oil flows through the critical Strait of Hormuz, which currently transits approximately 17% of global oil production, would result in a 20% surge in oil prices within the first month, with the potential for prices to double if the interruption were to endure for several months.

While some experts believe that the conflict between Iran and Israel is still in its early stages, others argue that any sell-offs in gold, silver, crude oil, and other commodities will be brief. Their perspectives highlight the complexities of the situation and the uncertainties surrounding the potential outcomes.

As the Middle East cautiously navigates the aftermath of the recent attack, all involved parties aim to gain something positive from the situation. Iran can reclaim its pride, Israel gains broader international support and showcases its military prowess, the UK reaffirms its unwavering allegiance to the U.S., and the U.S. can declare itself the voice of reason while seeking to regain credibility in the Middle East.

In conclusion, the rapid shift in market sentiment from anticipating war to relative calmness in the Middle East has had a profound impact on commodity prices. Oil and gold prices experienced negative movements, suggesting that investors are now factoring in a reduced likelihood of further escalation in Iran-Israel tensions. However, the situation remains complex, and any potential retaliation by Israel could have significant implications for energy markets.