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Oil prices fell as markets reopened in the wake of Iran's military strike on Israel, with traders shrugging off concerns that the conflict could escalate into an all-out war and limit supplies from the region.
Brent crude, the international benchmark, settled at $90.45 a barrel as trading began in Asia on Monday morning. US West Texas Intermediate crude also remained broadly unchanged at $85.72 a barrel.
The weak reaction suggests that markets are betting that the repercussions of the strike will be contained after Iran said it considered the matter “over” and Washington sought to calm tensions.
Traders were anxiously watching how the market would react after the Islamic Republic launched its first ever attack on Israel from its own territory on Saturday. Tehran sent drones and missiles to the Jewish state in response to a suspected Israeli attack on its consulate in Damascus that killed a number of military leaders.
Daniel Haynes, chief commodities strategist at ANZ Bank, said the calculated nature of the attacks and the fact they were well-deployed had eased market concerns.
“We saw a rise in oil prices ahead of the weekend, so a geopolitical price premium had already been built up ahead of this event,” he said.
US President Joe Biden urged Israel to take a measured approach in its response. Prime Minister Benjamin Netanyahu's government met on Sunday but did not make a decision on how the country would respond.
“The matter can be considered closed,” Iran’s Permanent Mission to the United Nations said in a statement on Saturday. However, if the Israeli regime makes another mistake, Iran's response will be much more serious.
Experts warned that Israel's violent response could exacerbate the conflict, restrict oil supplies from the region and raise prices.
“Major Israeli retaliation could trigger a destabilizing cycle of retaliation and push this conflict up the escalation ladder,” said Helima Croft, head of global commodities strategy at RBC Capital Markets and a former CIA analyst. “In such a scenario, we believe the risks to oil are not insignificant.”
“While Iran lacks the ability to close the Strait of Hormuz, it appears to retain the ability to repeat the 2019 playbook of attacking tankers, pipelines and critical energy infrastructure,” she added.
Oil markets rose to their highest levels since October in recent weeks following the attack on Damascus, as markets assessed the potential for an escalation in the conflict that could affect Gulf supplies.
The fallout from the strike could push prices “toward, if not beyond, $100 a barrel,” said Bob McNally, president of Rapidan Energy Consulting and a former energy adviser to George W. Bush.
“The market was satisfied that the Gaza conflict expanded to include Iran, thus posing a material risk to Persian Gulf oil and [liquefied natural gas] He said: Production and export.
The worsening conflict threatens to shock an already tight oil market globally, with demand surging in major economies such as the United States and China while OPEC+ producers restrict supply.
Ayham Kamel, head of the Middle East and North Africa department at the Middle East and North Africa Institute, said: “The United States and China will lose from the expansion of the conflict because it will greatly affect energy exports from the region, oil prices, and the global economy.” Eurasia Consulting Group.
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Any rise in prices would come at a particularly sensitive moment for the US president, who is struggling to sell his economic record to voters ahead of the November election amid stubbornly high inflation.
The additional rise in crude oil prices threatens to exacerbate already high prices at gas stations months before Americans head to the polls. Gasoline prices in the United States average $3.63 a gallon, according to auto group AAA, up about 15 percent since the beginning of the year.
“It's hard to overstate how unwelcome higher oil prices for geopolitical reasons are for the economy and President Biden's reelection,” McNally said.
