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Oil shrugged off Iran’s unprecedented attack on Israel, with prices easing on speculation that the conflict would remain contained.
Brent crude lost as much as 1.4% in London, falling back below $90. More than 300 missiles and drones were fired by Iran at the weekend, the first time it has struck Israel from its soil, though most were intercepted. Iran’s mission to the United Nations subsequently said it considers the matter to be concluded while its Foreign Ministry later added that it doesn’t want to raise tensions in the Middle East.
“This war may move down the escalation ladder if the Israeli government follows the advice of the White House and forgoes retaliatory action,” RBC Capital Markets LLC analysts including Helima Croft said in a note. While the Iranian action was “far more expansive than previous reprisals, it was still telegraphed in advance,” they said.
Oil has been one of the strongest performers in commodities this year as OPEC+ keeps a tight rein on supply to drain inventories and support prices. The renewed tensions have added further impetus to crude in recent weeks as traders braced for the weekend attack. Though a small amount of that pressure cooled on Monday, there are still wider risks to prices in the longer-term if tensions remain elevated.
“Without an off-ramp, geopolitical risk is likely to become embedded in crude prices for the foreseeable future,” Societe Generale analysts including Ben Hoff wrote in a note. “An immediate and substantive Israeli response is unlikely as it would be hard to undertake without US support.”
US officials, speaking on condition of anonymity, said that while the attack was meant to be deadly and destructive, Washington was urging Israel against retaliation. The concern, though, was that such logic might not prevail, according to a person familiar with the discussions.
Shipping risks have also been in focus after Iran seized a vessel, the MSC Aries, near the key Strait of Hormuz shortly before the strikes against Israel. The ship’s beneficial owner is part of Israel-linked Zodiac Group, according to data compiled by Bloomberg. The move raises concerns over the safety of vessels in the region, adding to previous logistical disruptions.
“The situation is fluid, and if Israel signals it will not retaliate, market tensions will ease,” said Arne Lohmann Rasmussen, head of research at A/S Global Risk Management. “The most feared scenario is the closure of the Strait of Hormuz. I don’t think Iran will close the strait, but the risks are growing.”
While price moves were restrained, early trading volumes were more brisk than normal. That follows a record week of trading in Brent call options in advance of the attack.
Oil markets have tightened in recent months, lifting energy costs and posing a headache for central bankers as they seek to drive home their push to quell inflation. Ahead of Tehran’s weekend strike, analysts had been addressing the possibility oil could once again hit $100 a barrel.