Short-term “sharp fluctuations” are expected in oil prices due to the Iran-Israel tension

Iran’s response to Israel’s attack on the consulate building in Damascus on April 1, by launching hundreds of kamikaze drones, ballistic, and cruise missiles without consulting regional proxies for the first time on April 13, increased tension in the Middle East, which hosts most of the world’s oil resources.

The possibility of further escalation in the region has raised concerns that global oil supply disruptions will lead to higher oil prices.

The price of Brent crude oil exceeded $92 on April 12, expecting Iran to retaliate against Israel, reaching its highest level since October 2023. On the same day, West Texas Intermediate (WTI) crude oil reached $87.67 per barrel.

The statement on April 14 that Iran’s military operation had been successful and was not intended to continue, albeit limited, helped to calm the risk perception. This somewhat alleviated the upward pressure on oil prices on the first trading day following the attack.

While debates continue about how and when Tel Aviv will respond to Iran’s retaliation attack, oil prices have followed a volatile trend.

The price of Brent crude oil rose to $91.05 on the first trading day of the week but fell to $86.09 on Thursday. Meanwhile, WTI crude oil traded in the range of $81.56 to $86.28 per barrel throughout the week.

Following reports in the morning hours that Israel had launched an attack on Iranian territory, oil prices rapidly responded upwards, but during the day, they gave back much of those gains.

“Geopolitical risk premium will stabilize and gradually decrease” Jorge Leon, Senior Vice President of Rystad Energy, an independent research firm based in Norway, told AA that the current geopolitical tension continues to be a significant risk factor.

Leon stated that eyes in the market are turned to the Middle East to see whether Israel’s retaliation against Iran will be a one-time event or a spark igniting a broader conflict between the two regional powers.

Leon pointed out that following reports of Israel’s attack on Iranian territory, oil prices quickly responded but then retreated. He said, “Although it is difficult to evaluate whether this is a temporary pause or the beginning of a new escalation in the conflict between Iran and Israel, the initial market reaction indicates that the former is more likely.”

Leon believes that the most likely scenario is that the tension will not escalate, but this does not mean an end to hostilities and armed attacks between the parties. He expressed that in this scenario, as in today’s attack by Israel, there would be well-coordinated retaliatory attacks between the parties.

Leon emphasized that the real risk is the possibility of either party making a wrong move triggering a new escalation in the already unstable region. He said:

“If one thing is certain, it is that geopolitics will play an even greater role in the oil market in the coming days and weeks. Therefore, sharp price fluctuations may occur in the short term.”

Leon cited yesterday’s attack as a good example of these fluctuations, saying, “Rystad Energy calculates that the ‘fair value’ of Brent crude for April is just under $83 per barrel, entirely based on supply and demand fundamentals. This means that the current geopolitical risk premium is around $5 to $6 per barrel.”

Leon emphasized that unless there is a significant escalation in conflicts in the Middle East, the geopolitical risk premium will stabilize and gradually decrease. He said, “We have two reasons for this claim. First, the OPEC+ group has nearly 7 million barrels per day of unprecedented spare capacity. Second, in the absence of real supply disruptions, geopolitical fatigue will begin to play a role in a few weeks.”

OPEC+ group and spare production capacities may come into play in higher price increases Independent Oil Market Analyst Gaurav Sharma said that until tensions in the Middle East ease, oil prices will remain at their highest levels in the short term in the last 6 months.

Sharma pointed to the recent developments on the Iran-Israel front, saying, “The situation is evolving rapidly, but Israel’s action seems limited in scope and more like a warning than an attack. Iran also downplays this event. As long as there is no escalation, oil prices will remain at current levels.”

Sharma also commented on the scenario of further escalation between the parties, saying, “If Israel responds to Iran’s ballistic missile and drone attacks on its territory in a similar manner, we will likely see Brent crude futures fluctuating between $85 and $95 per barrel.”

Sharma stated that the risk premium in the oil market is not what it used to be, mentioning that OPEC+ non-Middle Eastern oil from countries like the US, Brazil, Canada, and Norway, as well as new exporters like Guyana, will also affect price movements.

Sharma suggested that in the case of higher price increases, the OPEC+ group may also intervene. He said, “If there is a serious escalation in the Middle East conflict, the OPEC+ group will abandon voluntary production cuts as they will not want oil prices to exceed $100 per barrel. There is quite a bit of spare production capacity in the market, and I believe it will come into play if geopolitical tensions continue.”

source: prepared by Melisa Beğiç

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