Oil prices experienced a decline on Monday as the market reacted to Iran’s weekend assault on Israel, which resulted in limited damage as per the Israeli officials’ reports. This move prompted a reduction in risk premiums among market participants.
Market reaction
Brent futures for June delivery fell by 50 cents to USD 89.95 a barrel, while West Texas Intermediate (WTI) futures for May delivery dropped by 52 cents to USD 85.14 a barrel. The decline followed Iran’s attack involving over 300 missiles and drones, marking the first assault on Israel from another nation in more than 30 years.
Limited impact
Despite concerns about a broader regional conflict potentially disrupting oil traffic through the Middle East, Iran’s attack resulted in only modest damage. Israel’s Iron Dome defence system intercepted several missiles, and there were no reported casualties. The attack, labelled as retaliation for an airstrike on Iran’s Damascus consulate, did not cause significant disruptions.
Market analysis
Warren Patterson, head of commodities strategy at ING, noted that the market had already priced in the possibility of an attack in the days leading up to the event. He suggested that the limited damage and absence of casualties could lead to a measured response from Israel, reducing uncertainty.
Supply risks
Iran’s significant oil production, exceeding three million barrels per day, poses supply risks amid stricter oil sanctions and potential Israeli targeting of Iran’s energy infrastructure. However, the United States maintains strategic petroleum reserves, and OPEC holds more than 5 million barrels per day of spare production capacity to address any supply disruptions.
Potential price effects
While oil benchmarks had risen in anticipation of Iran’s retaliation, analysts anticipate that sustained price effects would require a significant disruption to supply, such as constraints on shipping in the Strait of Hormuz. So far, the Israel-Hamas conflict has had minimal impact on oil supply.
Market outlook
ANZ Research analysts highlighted that the conflict’s resolution depends on Israel’s response and its containment within the region. They suggested that unless the situation escalates significantly, oil markets may not experience immediate reactions.
Citi Research analysts suggested that prolonged tensions could maintain oil prices in the range of USD 85-USD 90 per barrel. However, a direct conflict between Iran and Israel could push prices above USD 100 per barrel, depending on the events’ nature.
Despite initial market fluctuations in response to Iran’s attack on Israel, the limited impact and absence of significant disruptions to oil supply have mitigated sustained price effects. However, the situation remains fluid, with market dynamics closely tied to geopolitical developments in the Middle East.