Oil prices fell on Monday as market participants pulled back on risk premiums following Iran’s controlled attack on Israel over the weekend that it said would cause limited damage.
Nevertheless, uncertainty regarding Israel’s response remains.
Brent futures for June delivery were down 50 cents, or 0.5%, at $89.95 a barrel by 06:30 GMT, while West Texas Intermediate (WTI) futures for May delivery were down 52 cents, or 0.6%, at $85.14 a barrel.
Iran’s attack involved more than 300 missiles and drones and was significant as it was the first attack on Israel from another country in more than three decades. It is also very important that this attack is on the Iranian side and under control. Iran has transformed from a behind-the-scenes supporter to a formal national adversary.
However, no one has any intention of getting into a broader regional conflict affecting oil traffic in the Middle East.
The attack, which Iran described as retaliation for an airstrike on the Damascus consulate, caused only modest damage, with missiles shot down by Israel’s Iron Dome defense system. By the way, the consequences of a serious devastating attack would be very severe.
Israel, which is at war with Iranian-backed Hamas militants in Gaza, neither confirmed nor denied striking the Iranian consulate.
The attack was largely priced in the days leading up to it. Additionally, the limited damage and lack of casualties means Israel’s response could be more measured. But there is still a lot of uncertainty and everything depends on how Israel reacts now.
Since Iran currently produces over 3 million barrels per day (bpd) of crude oil as a major OPEC producer, supply risks include tighter oil sanctions and an Israeli response targeting Iran’s energy resources.
However, in the event of a significant supply loss, more crude oil will be released from the US’s strategic oil reserves, and OPEC has a spare production capacity of more than 5 million barrels per day.
If prices rise significantly following supply losses, it is conceivable that the group will consider bringing some of this spare capacity back to the market.
Oil prices rose on Friday in anticipation of a retaliatory attack by Iran, reaching their highest level since October.
Analysts were generally expecting a short-term rise in prices this morning, but the more pronounced and longer-lasting price effects of the rise would be much more dramatic in the case of shipping restrictions in the Strait of Hormuz near Iran.
The attack on Iran’s embassy in Syria and Iran’s retaliation increased tension in the Middle East. However, given the large spare capacity and the already high geopolitical risk premium, an immediate reaction in crude oil prices is not expected. So far the Israel-Hamas conflict has had little tangible impact on oil supplies.
Israel’s response will determine whether the escalation ends. The conflict could still be contained between Israel, Iran, and their proxies with possible US intervention. Only in an extreme case can markets be realistically affected.
Analysts said prolonged tensions in the second quarter of this year left oil priced largely in the $85-90 range per barrel. With the market generally in balance in terms of supply and demand throughout the first quarter, any easing of tensions could cause prices to fall quite sharply to $70-$80 per barrel.
What is not priced in the current market is a potential continuation of direct conflict between Iran and Israel and the risk that oil prices could rise above $100 per barrel depending on the nature of events.
