Oil prices fell sharply on Monday after Israel’s attack on Iran at the weekend avoided oil and nuclear facilities and Tehran gave a measured response to the strikes.
Brent crude, the international benchmark, was down 6.1 per cent at $71.40 a barrel in European trading. West Texas Intermediate, the US benchmark, fell 6.4 per cent to $67.21 a barrel.
The declines came after Iran’s supreme leader Ayatollah Ali Khamenei on Sunday signalled a measured response to Israel’s attack the previous day, refraining from issuing any direct threats of retaliation.
Oil market insiders said the falls showed that prices were once again being driven by macro factors such as the weak outlook for Chinese demand, which had previously been weighing on crude.
Monday’s moves were “driven by the perception that this round of tit-for-tat hostilities between Israel and Iran is contained”, said Bill Farren-Price, senior research fellow at the Oxford Institute for Energy Studies.
“That doesn’t mean it can’t escalate at a later date, but for now it means that the macro forces that have been pressuring oil lower are back in control.”
The Financial Times reported last month that Saudi Arabia was ready to abandon its unofficial price target of $100 a barrel for crude and increase output from December 1, adding to investor bearishness.
The US had pressed Israel to avoid Iran’s nuclear and oil sites in any retaliation to Iran’s ballistic missile attack at the start of October. The conflict involving Israel, Iran and Iran-backed militants has raised concerns that the Middle East is heading towards a wider conflict.
However, Iran’s initial reaction was to play down the impact of the Israeli strikes. On Saturday, the General Staff of the Armed Forces said Iran’s emphasis was on supporting a ceasefire in Gaza and Lebanon.
“The recent geopolitical flare-ups are no longer reflected in a geopolitical premium, nor [in] the absolute level of oil price where the bearish supply/demand dynamics are dominating still,” said Sophie Huynh, senior cross-asset strategist at BNP Paribas Asset Management. “At this stage, the market is not pricing any disruption yet on the Strait of Hormuz.”
Brent crude prices had jumped in recent weeks over fears of supply disruption.
Analysts at Goldman Sachs said last week that the market focus was shifting from the Middle East conflict towards “the risks of oversupply in 2025”, as Opec members plan to unwind voluntary production cuts this year.
They added that in previous periods of supply disruption, Saudi Arabia and the United Arab Emirates alone had made up about 80 per cent of the shortfall “within two quarters”.
“The geopolitical risk premium in oil prices is limited as Israel-Iran tensions have not significantly affected oil supply from the region and as spare capacity is high,” they said.
