Oil Prices Dip After Iran’s Attack on Israel: Analyzing Market Response and Future Implications

On Monday, trade saw a drop in oil prices as risk premiums were reduced by market players due to Israel’s government reporting limited damage caused by Iran’s attack on Saturday.

At 4:30 AM GMT, Brent futures for delivery in June dropped by 23 cents or 0.2% to reach $90.22 per barrel and West Texas Intermediate (WTI) futures for May delivery also declined by 29 cents or 0.3%, settling at $85.37 a barrel.

The recent onslaught, comprising of over 300 drones and missiles, marks the initial assault on Israel from an outside nation in more than thirty years. Such a development has triggered apprehensions regarding an all-encompassing regional strife that could potentially disrupt oil transportation across the Middle East.

Despite being described by Iran as retaliation for an airstrike on their Damascus consulate, the attack resulted in only minimal destruction due to Israel’s successful interception of missiles with its Iron Dome defense system.

It has not been confirmed or denied by Israel that they targeted the consulate, despite being engaged in combat with Hamas militants supported by Iran in Gaza. “An attack was largely priced in the days leading up to it. Also the limited damage and the fact that there was no loss of life means that maybe Israel’s response will be more measured,” said Warren Patterson, head of commodities strategy at ING. However, there is still a great deal of doubt surrounding the situation and everything hinges on Israel’s subsequent actions.

According to ING’s client note on Monday, Iran is one of the largest producers within OPEC and currently generates more than 3 million barrels per day (bpd) of crude oil. The supply risk associated with this production level involves enforced sanctions on oil as well as potential targeting by Israel towards Iran’s energy infrastructure.

According to the statement, in case of substantial supply depletion, the US has the option to release additional crude oil from its strategic petroleum reserves. Along with that, OPEC possesses a spare production capacity exceeding 5 million bpd.

In the event that supply losses drive prices to a substantial increase, it is assumed that the group will consider reintroducing some of their extra capacity into the market. OPEC has no interest in allowing prices to surge too high as this could result in reduced demand.

On Friday, the anticipation of Iran’s retaliatory attack caused an increase in oil benchmarks which reached their highest levels since October. Although analysts were anticipating a brief uptick in prices this morning, due to the minimal impact of the situation, they recognized that any substantial and enduring price fluctuations resulting from the escalation would necessitate a tangible hindrance on supply – for instance, shipping restrictions through Iran’s Strait of Hormuz. Thus far, the conflict between Israel and Hamas has had minimal real-world consequences on oil availability.