Oil prices fell more than $3 a barrel on Monday after Israel’s weekend retaliatory strike on Iran caused only limited damage, did not disrupt energy supplies, and eased geopolitical tensions in the Middle East.
Both Brent and WTI oil futures opened at their lowest levels since Oct. 1. By 0514 GMT, Brent was down $3.46, or 4.6%, to $72.59 a barrel, while WTI was down $3.37, or 4.7%, to $68.41 a barrel.
Indices gained 4% in choppy trading last week as markets priced in uncertainty around Israel’s response to the Oct. 1 Iranian missile strike and the extent to which it will support next month’s U.S. elections.
Analysts said the geopolitical risk premium in oil prices, built up by the expectation of a retaliatory Israeli strike, had diminished.
However, scores of Israeli jets flew more than 2,500 kilometers (1,500 miles) at dawn on Saturday, flying over two countries and carrying out three waves of strikes on arm production facilities near Tehran and in western Iran without losing a single aircraft!
The limited nature of the strikes, including avoiding oil infrastructure, raised hopes for a mitigation path that would see the risk premium reduced by a few dollars a barrel.
The market will be closely watching Iran’s rhetoric of a counter-attack in the coming weeks, which could send the risk premium rising again.
Market attention is expected to turn to ceasefire talks between Israel and the Iranian-backed militant group Hamas, which resumed over the weekend.
Despite Israel’s reduced aggression against Iran, there are doubts that Israel and its proxies Hamas and Hezbollah are intent on a permanent ceasefire.
This leaves the market at least slightly undervalued. Some analysts have lowered their Brent price target for the next three months to $70 a barrel from $74, accounting for a lower risk premium in the near term.
These leave the market slightly undervalued and there is a risk that OPEC+ producers will delay the planned increase in production beyond December.
In October, the Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, left oil production policy unchanged, including a plan to start increasing production in December. The group is set to meet on December 1.
