Oil prices sold off after President Donald Trump’s fire and fury comments in response to the rising threat from North Korea. Reports that North Korea has created a small nuclear war head and now is threating Guam is increasing the odds of a major conflict.

Concerns that rising tensions may inhibit growth saw oil fall along with stocks. Yet a bullish American Petroleum Institute report and a renewed commitment by OPEC cheaters to rein in over production is giving oil support but still raises the larger question as to whether a conflict with North Korea is ultimately bullish or bearish for oil.

It is a question one would not like to bring up but it is one that sadly, at some point, we may have to deal with. Oil producers still must do business and provide services and consumers will still need oil. War, at least conventional war,  is generally bullish for oil. Initially, the market sold off after President Trump’s comments because of concern that war fears could hamper economic activity. Yet if the war drums continue to beat we should see oil rise especially because the uncertainty from the fall out of what war might bring. During the months leading up to Operation Desert Storm in Iraq oil railed about 12.5%. After the initial attack prices fell hard but there was a clear victory, at least militarily. This time with North Korea there may be no easy answer or quick conclusion. One hopes Kim Jong Un can pull back from the brink of madness but we cannot count on it.

The U.S. military is the largest institutional consumer of oil in the world and consumes more than 100 million barrels of oil a year which is more than the entire country of North Korea consumes. North Korea is totally dependent on oil shipments from China and Russia which could cut off supply and bring North Korea and its military to its knees. That is the best threat to avoid war but we need China and Russia to act now. If they do not, it may be too late.

In the more mundane world of supply and demand, things are looking bullish. The API reported a massive 7.89 million barrels drop in crude supply as U.S. and global oil inventories continue to drain at a record pace. The U.S. has the best handle on reporting oil supply and with strong demand in China and Europe, the draw is a sign that oil supply overhang is going away. This is also proving what I have been saying for some time that shale oil production cannot offset OPEC cuts and rising demand.