Oil Prices Decline Following Islamic Republic's Attack on Israel

Oil prices fell on Monday as market participants reduced the risk premium following the Islamic Republic's weekend attack on Israel, which the Israeli government claimed caused limited damage. The risk premium is the excess return over the risk-free rate that investors require as compensation for the greater uncertainty associated with risky assets. According to Reuters, Brent crude oil futures for June delivery fell by 50 cents or 0.5% to $89.95 per barrel, while West Texas Intermediate (WTI) futures for May delivery dropped by 52 cents or 0.6% to $85.14 per barrel. The attack by the Islamic Republic of Iran on Israel involved over 300 missiles and drones, marking the first direct attack on Israel by another country in over three decades, raising concerns about a broader regional conflict that could impact oil traffic through the Middle East. Warren Patterson, head of commodity strategy at ING, told Reuters, 'In the days leading up to pricing, the attack was largely factored in. The limited damage and the fact that the attacks did not result in casualties could mean that Israel's response may be more measured.' However, it is clear that there are still many uncertainties, and everything depends on how Israel reacts. As Iran currently produces over 3 million barrels of crude oil per day as one of the main producers in the Organization of the Petroleum Exporting Countries (OPEC), supply risks include harsher oil sanctions, and Israel's response could involve targeting Iran's energy infrastructure, a point that ING noted in a separate memo on Monday. However, in the event of a significant supply reduction, the United States could release more crude oil from its strategic reserves, while OPEC has over 5 million barrels per day of excess production capacity. According to a section of ING's memo, 'If prices were to increase significantly due to a supply reduction, it is conceivable that this group [OPEC] would seek to bring some of this excess capacity back to the market. OPEC does not want to see prices rise too high given the risk of demand destruction.' Oil indices rose on Friday in anticipation of a retaliatory attack by the Iranian government, reaching their highest level since October. Analysts widely expected at least a short-term price increase this morning, but stated that more significant and longer-lasting price effects from escalating tensions would require supply disruptions, such as transportation restrictions in the Strait of Hormuz near Iran. So far, the Israel-Hamas conflict has had little noticeable impact on oil supply. According to analysts at ANZ, 'The attack on the Iranian embassy in Syria and Iran's retaliatory actions have heightened tensions in the Middle East. However, we do not expect an immediate reaction in crude oil prices given the additional capacity and high geopolitical risk.' Accordingly, based on this analysis, 'Israel's response will determine whether tensions escalate or de-escalate. The conflicts could still be limited to Israel, Iran, and its proxy forces, or potential U.S. involvement. Only in a dire situation will we see a realistic impact on oil markets.' Analysts at Citi Research state that prolonged tensions have largely priced oil between $85 and $90 per barrel in the second quarter of this year. As the market has generally balanced supply and demand during the first quarter, any de-escalation could lead to a sharp drop in prices to the upper range of $70 or $80 per barrel. These analysts have noted that 'what is not currently priced in the market, in our view, is the potential continuation of direct conflict between Iran and Israel, which we estimate could push oil prices above $100 per barrel depending on the nature of events.' The average gasoline consumption reached 120 million liters per day. The fuel card for gas stations will not be removed; the government has retreated until 'further notice.' A NATO official stated: Ukraine's attacks on Russian oil refineries may have disrupted their capacity by more than 15%. Saudi Aramco, the Saudi oil giant, reported a decrease in its annual profit to $121 billion. Some OPEC Plus members will also reduce oil production in the second quarter of 2024.