Iran attack sees muted oil reaction
Crude oil’s initial reaction to Iran’s drone and missile attacks on Israel was muffled on Monday, with prices of the major contracts barely shifting. There were fears that the barrage of weapons fired at Israel signalled a major escalation of conflict in the Middle East, and the oil price would shift higher in response to heightened fears of possible supply disruptions.
But the price moves in early trade in Asia were moderate, with global benchmark Brent crude futures and US West Texas Intermediate (WTI) contracts little changed.
Brent gained as much as 50 cents to US$90.95 (3,650 baht) a barrel from the close of $90.45 on April 12, but was steady at $90.46 yesterday morning.
WTI also posted a small rise immediately after trading started, rising as much as 27 cents to $85.93 a barrel from the close of $85.66 on April 12, before giving up the gain to trade down 8 cents at $85.58.
The message the market appears to be sending is that, for now, the risk of a major escalation and retaliatory strikes by Israel is relatively low.
This might be because that little damage was inflicted on Israel, despite Iran and its proxies sending more than 300 missiles and drones in the weekend attack.
Israel has signalled that while its cabinet has authorised retaliatory strikes, such actions aren’t imminent.
It’s also likely that oil investors are weighing the true nature and purpose of the Iranian attacks.
It’s likely that Tehran knew that the bulk of the drones and missiles would be intercepted and, and therefore what they wanted was a symbolic strike to show that Iran will respond to attacks, such as the April 1 strike on its embassy in Syria that killed top commanders of its Revolutionary Guards.
If the motivation and intent of the Iranian action is viewed more as symbolic and a way to keep face, then it’s possible that any major escalation will be avoided.
INTERESTS ALIGN?
The other factor is that for the bulk of actors in the Middle East and beyond, any escalation that results in a real threat to oil infrastructure and shipping is not in their interests.
Iran is getting back to some semblance of normality in its oil exports after years of Western sanctions, and would be reluctant to see any serious US-led moves to once again limit its crude shipments.
The administration of US President Joe Biden doesn’t want the conflict to escalate in an election year as higher gasoline prices are unpopular with voters, as is the thought of the United States being dragged into another protracted and likely un-winnable Middle East conflict.
Middle East exporters such as Saudi Arabia, the United Arab Emirates and Kuwait also want to be seen to be ensuring the stable supply of oil, even if they like the idea of a price anchored closer to $90 a barrel.
The problem for the oil exporters is that if crude prices do head to $100 a barrel and higher, it’s likely to start hitting demand as Western countries keep monetary policy tight to avoid a fresh round of inflation, and developing countries in Asia trim imports.
The International Energy Agency has already trimmed its forecast for 2024 oil demand growth, cutting it by 130,000 barrels a day to 1.2 million bpd, citing weaker consumption in developed economies.
There are some actors who may benefit from an increased Middle East conflict, such as former US president and current candidate Donald Trump, as it gives him a platform to rally against higher fuel prices and the threat of a wider conflict.
Russian President Vladimir Putin may also see an upside to a bigger conflict, as higher oil prices would boost his revenue and Western attention on his war in Ukraine would be diverted to the Middle East.
But it remains the case that the majority of parties probably want to see the situation de-escalated, and ultimately seek some kind of ceasefire in Gaza.
But what the Iranian strikes on Israel show is that tensions can boil over very quickly in the Middle East, and that the conflict remains intractable and a resolution seems as far away as ever.