Oil Prices Tumble as Tensions in the Middle East Cool

Crude oil prices began the week with a loss, after Israel’s retaliatory strike against Iran failed to inflict substantial enough damage, according to the Iranian side, thus reducing the risk of another flare-up in violence.

“The more limited nature of the strikes, including avoiding oil infrastructure, have raised hopes for a de-escalatory pathway, which has seen the risk premium come off a few dollars a barrel,” Saul Kavonic, energy analyst with MST Marquee, told Reuters.

Indeed, Israel did not target oil infrastructure or nuclear facilities in Iran, which reignited hopes that the Middle East may yet avoid a descent into a total war that would compromise the security of energy supply from the region to the rest of the world.

Reuters’ Clyde Russell commented that the oil market had taken the latest exchange between Israel and Iran as a sign of de-escalation, as suggested by the oil price drop earlier today.

“The more targeted response from Israel leaves the door open for de-escalation and clearly the price action in oil this morning suggests the market is of the same view,” ING’s Warren Patterson and Ewa Manthey said in a note. “While it is still unclear if or how Iran may retaliate, the government has downplayed the damage caused by Israel’s response.”

A perception of surplus supply and lackluster demand is also contributing to the bearish sentiment among oil traders. China is front and center in the demand slot, while OPEC+ production caps continue to fail to impress, even as U.S. oil output growth slows down.

“We think this leaves the market at least somewhat undervalued, with some risk OPEC+ producers may push back the planned increase in output targets beyond December,” energy analyst Tim Evans told Reuters.

Israel’s “retaliation on Saturday was mostly viewed as underwhelming and proportionate,” Harry Tchilinguirian, group head of research at Onyx Capital Group, told Bloomberg. “Poor macroeconomic realities centered around China will take over the narrative again to push the oil price lower.”