Oil prices dropped approximately $4 per barrel on Monday after Israel’s retaliatory strike against Iran over the weekend left oil and nuclear facilities untouched, avoiding disruptions to energy supplies.
By 1445 GMT, Brent futures had fallen by $4.13, or 5.43 per cent, to $71.92 per barrel, while U.S. WTI crude futures were down $4.04, or 5.63 per cent, at $67.74.
Both Brent and U.S. WTI crude hit their lowest levels since October 1 at the opening.
Last week, the benchmarks had risen 4 per cent in a volatile market, as uncertainty over the upcoming U.S. election and Israel’s potential response to the Iranian missile strike on October 1 influenced trading.
“The price of crude oil fell by 6% on Monday to $67 a barrel for WTI and $71 for Brent. This return to the lows of the last two months is due to Israel’s attack on Iran’s oil capacity. The aftermath and retaliatory rhetoric from politicians in both countries have fuelled speculation that both sides are trying to avoid escalation for now. As a result, the geopolitical risk premium has fallen sharply. The price has returned to levels seen before the latest escalation in the Middle East,” Alex Kuptsikevich, the FxPro chief market analyst.
What’s driving the rally?
Israeli jets executed three waves of strikes before dawn on Saturday, targeting missile production facilities and other military sites near Tehran and throughout western Iran, marking a significant escalation in the ongoing tensions between the two nations.
The strikes were more focused on military objectives than U.S. officials had initially anticipated, alleviating concerns that Israel might retaliate against Iran’s nuclear facilities or oil infrastructure following an Iranian missile attack on October 1.
Analysts noted that the geopolitical risk premium previously reflected in oil prices began to diminish after the strikes. Citi revised its Brent crude price forecast for the next three months down to $70 per barrel from $74, attributing this adjustment to a reduced risk premium in the near term, as indicated by analysts led by Max Layton.
The decision not to target Iran’s oil infrastructure helped lower the market’s risk premium and shifted focus back to OPEC’s potential actions to stabilize the market amid sluggish demand growth, according to Callum Macpherson, head of commodities at Investec.
OPEC and its allies maintained their oil output policy unchanged last month, with plans to increase production starting in December. The group is scheduled to meet on December 1 for further discussions.
Despite the strikes, tensions remain elevated. Iranian Foreign Ministry spokesperson Esmaeil Baghaei stated on Monday that Iran would “use all available tools” in response to Israel’s recent actions. Meanwhile, Commonwealth Bank of Australia analyst Vivek Dhar expressed skepticism about any quick de-escalation of conflict in the Middle East.
“As the new week begins, the price is testing the horizontal support of the last two years. A close below $65 in October would be a major bearish signal that could accelerate oil’s decline. There is a risk of a dam bursting, with the next downside target being the $50 area, a psychologically important intermediate level. The history of the 2008-2009, 2014-2015, and 2020 collapses suggests that the final ‘bottom’ may not come until the $30-35 area,” Kuptsikevich added.
