Oil Prices Fall as Risk Premiums Dial Back After Iran’s Attack on Israel
In a move that surprised market participants, oil prices took a hit on Monday following Iran’s weekend attack on Israel. The Israeli government reported that the attack caused limited damage, leading to a decrease in risk premiums, as reported by Reuters.
Brent futures for June delivery dropped 0.5 percent to $89.95 a barrel, while West Texas Intermediate futures for May delivery were down 0.6 percent at $85.14 a barrel by 9:30 a.m. Saudi time.
Iran’s Attack on Israel Raises Concerns of Broader Regional Conflict
Iran’s attack on Israel involved over 300 missiles and drones, marking the first attack on Israel from another country in over three decades. This raised concerns about a potential broader regional conflict that could impact oil traffic through the Middle East.
Despite the significant scale of the attack, which Iran claimed was retaliation for an airstrike on its Damascus consulate, the damage was minimal. Israel’s Iron Dome defense system managed to intercept and shoot down most of the missiles, leading to limited impact on the ground.
Warren Patterson, head of commodities strategy at ING, noted, “An attack was largely priced in the days leading up to it. Also, the limited damage and absence of casualties suggest that Israel’s response may be more measured. However, uncertainty remains, and it all hinges on Israel’s next move.”
Potential Supply Risks and Response Scenarios
As Iran is a significant crude oil producer within OPEC, concerns about supply risks have emerged. ING highlighted the possibility of stricter oil sanctions and potential targeting of Iran’s energy infrastructure in an Israeli response.
In the event of significant supply losses, the US could release more crude oil from its strategic reserves, while OPEC has spare production capacity to address disruptions. Analysts anticipate that OPEC would intervene to stabilize prices if supply losses lead to a significant rally.
Market Reaction and Price Outlook
Oil benchmarks had risen in anticipation of Iran’s retaliatory attack, reaching their highest levels since October. While analysts expected a short-lived rally on Monday, sustained price effects would require a material disruption to supply, such as shipping constraints in the Strait of Hormuz.
ANZ Research analysts stated, “We don’t expect an immediate reaction in crude oil prices given ample spare capacity and elevated geopolitical risk. Israel’s response will be crucial in determining the escalation’s impact on oil markets.”
Citi Research analysts noted that prolonged tensions could keep oil prices in the $85-$90 per barrel range. However, a direct conflict between Iran and Israel could potentially push prices above $100 per barrel, highlighting the uncertainty in the market.