Apr 15 2024: Oil prices dropped on Monday as traders scaled back risk premiums after Iran’s weekend strike on Israel, which the Israeli government described as causing limited damage.
Brent futures for June delivery fell by 50 cents, or 0.5%, to $89.95 per barrel by 0630 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, marking the first attack on Israel from another nation in over three decades. This raised concerns about a broader regional conflict impacting oil traffic through the Middle East.
However, the attack, termed as retaliation by Iran for an air strike on its Damascus consulate, resulted in only minor damage, with Israel’s Iron Dome defense system intercepting missiles. Israel, engaged in conflict with Iran-backed Hamas militants in Gaza, has not confirmed or denied involvement in the consulate strike.
“Market expectations had already factored in an attack in the days leading up to it. Additionally, the limited damage and absence of casualties suggest that Israel’s response might be measured,” explained Warren Patterson, ING’s head of commodities strategy.
Nonetheless, uncertainty remains, contingent on Israel’s subsequent actions.
As Iran currently produces over 3 million barrels per day (bpd) of crude oil as a key OPEC producer, potential supply risks include stricter oil sanctions and possible Israeli strikes on Iran’s energy infrastructure, ING noted in a client briefing.
In case of significant supply disruptions, the U.S. could release additional crude oil from its strategic petroleum reserves, while OPEC holds over 5 million bpd of spare production capacity.
“Should prices surge due to supply disruptions, it’s likely that OPEC would consider bringing back some of this spare capacity to stabilize the market. OPEC aims to prevent excessively high prices that could lead to demand reduction,” highlighted ING in its note.
Oil benchmarks had climbed on Friday in anticipation of Iran’s retaliatory move, reaching their highest levels since October.
Analysts anticipated a temporary price rally but suggested that sustained and significant price impacts from the escalation would require a notable supply disruption, such as constraints on shipping in the Strait of Hormuz near Iran.
The Israel-Hamas conflict has had minimal direct impact on oil supply thus far.
“Although tension in the Middle East has increased due to the strike on Iran’s embassy in Syria and Iran’s response, immediate oil price reactions are not expected given ample spare capacity and existing geopolitical risk premiums,” stated ANZ Research analysts.
“The course of action taken by Israel will dictate whether the situation de-escalates or continues. The conflict could remain contained within Israel, Iran, and their proxies, potentially involving the U.S. Only in extreme circumstances do we foresee a realistic impact on oil markets.”
Citi Research analysts noted that ongoing tensions in the second quarter have already factored oil prices between $85 and $90 per barrel. Should tensions ease, prices could retreat significantly to the high $70s or low $80s per barrel range, given the market’s equilibrium in supply and demand during the first quarter.
However, a continuation of direct conflict between Iran and Israel, which is not currently factored into market prices, could push oil prices above $100 per barrel depending on unfolding events, as per Citi analysts.
