Oil drops as Middle East tensions ease

by Jonathan Adams
Oil jumps

Both Brent and U.S. WTI crude futures reached their lowest levels since October 1 at the open

Oil prices dropped more than $3 a barrel on Monday after Israel’s strike on Iran over the weekend were not as strong as anticipated, easing geopolitical tensions in the Middle East.

Both Brent and U.S. WTI crude futures reached their lowest levels since October 1 at the open. By 0139 GMT, Brent was at $72.70 a barrel, down $3.35, or 4.4%, while WTI slid $3.27, or 4.6%, to $68.51 a barrel.

The benchmarks added 4% last week in volatile trade as markets priced in uncertainty around the extent of Israel’s response to the Iranian attack on October 1 and the U.S. election next month.

The geopolitical risk premium that had built in oil prices in anticipation of Israel’s retaliatory attack came off, analysts said.

The more limited nature of the strikes, including avoiding oil infrastructure, have raised hopes for a de-escalatory pathway, which has seen the risk premium come off a few dollars a barrel, according to Saul Kavonic, a Sydney-based energy analyst at MST Marquee.

The market will be watching closely for confirmation Iran won’t counter attack in coming weeks, which could see the risk premium rise again, Kavonic said.

Commonwealth Bank of Australia analyst Vivek Dhar expects market attention to turn to ceasefire talks between Israel and militant groups that resumed over weekend.

Despite Israel’s choice of a low aggression response to Iran, we have doubts that Israel and Iran’s proxies are on track for an enduring ceasefire, he said in a note.

Citi lowered its Brent price target in the next three months to $70 a barrel from $74, factoring in a lower risk premium in the near term, its analysts led by Max Layton said in a note.

Analyst Tim Evans at Evans Energy said in a note: We think this leaves the market at least somewhat undervalued, with some risk OPEC+ producers may push back the planned increase in output targets beyond December.

Disclaimer: The opinions expressed by our writers are their own and do not represent the views of Trading and Investment News. The information provided on Trading and Investment News is intended for informational purposes only. Trading and Investment News is not liable for any financial losses incurred. Conduct your own research by contacting financial experts before making any investment decisions.

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