Oil Reverses Gains as Market Expects Limited Risk of Wider Conflict After Israel Strike
Oil prices gave up overnight gains but settled modestly higher following Israel's apparent retaliatory attack on Iran. Both oil benchmarks rallied more than $3 after the attack, reigniting concerns that a wider regional conflict could disrupt oil supplies. Meanwhile, this week, May ’24 WTI lost $2.52, or 3.2%, to finish at $83.14/Bbl.
On Friday, Israel responded to Iran's drone and missile attack from last weekend with what appeared to be a limited strike on Iran. The extent and impact of the Israeli strike seemed to be minimal as Iranian state media downplayed the incident, and Tehran indicated it had no plans for retaliation.
Recent weakness in oil prices indicates an easing risk premium. Friday’s muted response to the Middle East conflict may support the view that the oil market is cautiously optimistic that an escalation in the region can be contained. However, this week, trading in bullish oil options hit a record high as traders responded to Israel's vow of retaliation against Iran, indicating that any further escalation of the Middle East risks provoking a spike in oil prices.
Additionally, on Tuesday, Fed Chair Powell signaled that the long-anticipated rate cuts would be delayed following firm inflation and job data. This shift in tone prompted yields to the highest levels in months and the US dollar to a six-month high, making oil priced in USD more expensive for holders of other currencies.
Crude has rallied $11.50/Bbl, or 16% this year, driven by worsening hostilities in the Middle East and OPEC+ supply cuts that have tightened the market. AEGIS maintains a bullish outlook on the curve as global demand appears resilient amid declining global inventories. It is important to note that headline risks due to geopolitical surprises could shock prices higher in the near term.