Oil prices experienced a sharp decline at the start of the week, plunging nearly 6% following Israeli airstrikes against military targets in Iran. Brent crude traded around $71.65 per barrel, down 5.79%, while West Texas Intermediate (WTI) crude was priced at $67.55 per barrel, a drop of 5.89%.
Details of the Strikes
Israeli jets targeted military installations in Iran on Saturday, fulfilling a commitment to retaliate for a missile attack earlier in the month. Notably, the strikes were more restrained than anticipated, avoiding damage to Iran’s oil, nuclear, and civilian infrastructure—an approach aligned with the preferences of the Biden administration.
This restraint seems to have contributed to a decrease in the political risk premium associated with oil prices. In addition to falling prices, there was a noticeable shift in options trading, where bullish contracts were no longer commanding higher premiums over bearish ones, a trend observed since the Iranian missile attack.
ISRAEL POISED FOR MAJOR RETALIATION TARGETING IRAN’S OIL FACILITIES
Market Reactions and Forecasts
In light of these developments, Citigroup Inc. revised its Brent price forecasts downward, indicating reduced risks stemming from Middle Eastern conflicts. Iran’s state media reported that the nation’s oil facilities were operating normally. However, the Iranian foreign ministry cautioned that its response to future attacks would be proportionate to the nature of the threat.
The missile attack on October 1 restored a “war premium” to oil prices, briefly pushing the Brent benchmark above $80 a barrel earlier this month. Currently, prices are nearly $20 lower than they were in the immediate aftermath of the October 7 attack that intensified the ongoing conflict.
IRAN RAIN MISSILES ON ISRAEL IN RETALIATION
Market Outlook
Analysts predict further short-term downward pressure as the geopolitical premium continues to diminish. Arne Lohmann Rasmussen, chief analyst at A/S Global Risk Management, stated, “We see strong support around $70 and, with last night’s price drop, most of the geopolitical premium is likely already priced out.”
Looking ahead, the coming weeks are critical for oil prices, with several influential events on the horizon, including the US elections. Additionally, OPEC+ is set to gradually increase oil production starting in December, raising concerns about oversupply in a market that the International Energy Agency predicts will not require additional supplies in the near term.
Despite the recent downturn, key market indicators remain in a bullish backwardation structure, where near-term contracts are trading at a premium compared to later-dated contracts. However, the overall sentiment suggests that market strength is softening.
