Oil prices dropped more than $3 a barrel on Monday after Israel’s retaliatory strike on Iran over the weekend avoided hitting Tehran’s oil and nuclear facilities, which helped ease geopolitical tensions in the Middle East.
Both Brent and U.S. West Texas Intermediate (WTI) crude futures reached their lowest levels since October 1 at the market’s opening. By 07:50 GMT, Brent was priced at $72.92 a barrel, down $3.13 (or 4.1%), while WTI fell by $3.15 (or 4.4%) to $68.63 a barrel. Last week, the benchmarks had gained 4% amid volatile trading, as markets reacted to uncertainties regarding Israel’s response to the Iranian missile attack on October 1 and the upcoming U.S. elections. Scores of Israeli jets carried out three waves of strikes before dawn on Saturday against missile factories and other sites near Tehran and in western Iran. This marked the latest development in the escalating conflict between the Middle Eastern rivals.
Analysts noted that the geopolitical risk premium built into oil prices ahead of Israel’s retaliatory attack has decreased. Saul Kavonic, an energy analyst at MST Marquee in Sydney, stated, “The more limited nature of the strikes, particularly the avoidance of oil infrastructure, has raised hopes for a de-escalatory pathway, which has seen the risk premium drop by a few dollars a barrel.” He added, “The market will be closely watching for confirmation that Iran won’t counterattack in the coming weeks, as this could cause the risk premium to rise again.”
Vivek Dhar, an analyst at the Commonwealth Bank of Australia, suggested that market attention may shift to the ceasefire talks between Israel and the Iran-backed militant group Hamas, which resumed over the weekend. He expressed doubts about whether Israel and Iran’s proxies (Hamas and Hezbollah) are on track for a lasting ceasefire.
Citi has lowered its Brent price target for the next three months to $70 a barrel, down from $74, to reflect the lower risk premium in the near term, as noted by analysts led by Max Layton.
Tim Evans, an analyst at Evans Energy in the U.S., commented, “We believe this leaves the market somewhat undervalued, with a possibility that OPEC+ producers may delay the planned increase in output targets beyond December.” In October, the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, kept their oil output policy unchanged, including a plan to begin raising output in December. The group is set to meet on December 1 ahead of a full OPEC+ meeting.