Oil Prices Start the Week Lower as Fears of a War Between Israel and Iran Fade

Crude oil prices began the week with a loss as fears of an escalation between Iran and Israel dissipated.

The latest events in the Middle East appear to have convinced traders there is no immediate danger of an all-out war, so they are unloading their oil positions. This brought Brent crude down below $87 per barrel and West Texas Intermediate to below $83 per barrel.

This is bad news for Saudi Arabia, which needs oil prices close to $100 per barrel to balance its budget, according to a new estimate by the International Monetary Fund, which attributed the change to Saudi oil production cuts.

Speaking of $100, it appears institutional traders in energy commodities are not too worried it could happen. Per a recent Wall Street Journal report, these are focusing on spare production capacity as justification for a rather calm attitude. That’s regardless of the fact that spare capacity would only be used if its owners want it used.

This latter fact becomes even more important in light of the observation that “OPEC’s market power is more important this year than last year,” as made by Rystad Energy’s senior vice president Jorge Leon.

Meanwhile, economic concerns continue to exert downward pressure on prices. This week will see the release of the final estimate for U.S. GDP growth in the final quarter of the year, and it seems like there will be a substantial revision downwards, from 3.4% to 2%. The Fed, meanwhile, remains cold to rate cuts, further hurting hopes for demand stimulation.

Another noteworthy twist in oil’s recent story is that oil prices have not benefited from the prospect of more U.S. sanctions against Iran, either. Normally, sanctions drive concern about oil supply disruption but not this time, ING noted in a recent commodity market update.

By Irina Slav for Oilprice.com

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