Oil prices fall after Iran attack as market draws down risk premium

Oil prices fell during trade on Monday, as market participants dialled back risk premiums following Iran’s attack on Israel late on Saturday which the Israeli government said caused limited damage, Reuters reported.

Brent futures for June delivery fell 23 cents, or 0.2%, to $90.22 a barrel while West Texas Intermediate (WTI) futures for May delivery were down 29 cents, or 0.3%, at $85.37 a barrel by 0430 GMT.

The attack was the first on Israel from another country in more than three decades, raising concerns about a broader regional conflict affecting oil traffic through the Middle East.

As Iran currently produces over 3 million barrels per day (bpd) of crude oil as a major producer within the Organization of the Petroleum Exporting Countries (OPEC), supply risk includes more strictly enforced oil sanctions and that Israel’s response could include targeting Iran’s energy infrastructure, ING said in a client note on Monday.

But if there was significant supply loss, the U.S. could release further crude oil from its strategic petroleum reserves, while OPEC has over 5 million bpd of spare production capacity, it said.

“If prices were to rally significantly on the back of supply losses, one would imagine that the group would look to bring some of this spare capacity back onto the market. OPEC will not want to see prices going too high given the risk of demand destruction.”

Oil benchmarks had risen on Friday in anticipation of Iran’s retaliatory attack, touching their highest levels since October.

Despite the limited damage, analysts were widely expecting at least a short-lived rally in prices this morning, but that more significant and longer-lasting price effects from the escalation would require a material disruption to supply, such as constraints on shipping in the Strait of Hormuz near Iran.

The “strike on Iran’s embassy in Syria and Iran’s retaliation have raised tension in the Middle East. However, we don’t expect an immediate reaction in crude oil prices given ample spare capacity and an already elevated geopolitical risk premium,” said ANZ Research analysts in a note.

Analysts at Citi Research said prolonged tensions through the second quarter this year have largely priced oil at $85-90 per barrel. As the market has been broadly balanced in supply and demand throughout the first quarter, any de-escalation could see prices falling back quite sharply to the high $70s or low $80s per barrel range.