Oil Prices Start the Week Lower Despite Iran Attack on Israel

Crude oil prices began trade today with a decline following Iran’s retaliatory strike on Israel that the latter said had only done limited damage.

"An attack was largely priced in the days leading up to it. Also, the limited damage and the fact that there was no loss of life means that maybe Israel's response will be more measured," ING’s Warren Patterson said, as quoted by Reuters.

"But clearly, there is still plenty of uncertainty and it all depends on how Israel now responds," the Dutch bank’s head of commodity strategy also said.

Indeed, the degree of geopolitical uncertainty rose significantly despite the fact that Iran’s retaliation was a non-surprise, as the West seeks a diplomatic way out of a further escalation while both Iran and Israel vow to respond to each other’s next moves reciprocally.

ING’s Patterson and commodity strategist Ewa Manthey said in a note from earlier today that Iran had signaled the drone strike “concluded” the whole affair for it but it was not certain whether Israel saw things the same way.

Naturally, this has heightened risks around oil supply from the Middle East, and especially Iran, which despite sanctions has boosted its output to some 3 million barrels daily and is currently the fourth-largest producer within OPEC.

In this context, according to the Dutch bank, there were two risks inherent to oil supply in the situation. First, the U.S. could tighten the sanction noose because of the strike on Israel and prompt cuts in output. Second, Israel could retaliate by targeting Iranian energy infrastructure, again affecting supply.

Sanctions could take some Iranian output off the market, per ING, but an Israeli attack on infrastructure could cause more significant supply losses. Should this happen, oil prices will have much higher to go, even though the ING analysts pointed to a possible new release of oil from the U.S. SPR and OPEC’s spare capacity.

By Irina Slav for Oilprice.com

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