Fear premium fades as oil markets await Iran’s next move after Israeli airstrikes
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This week, all eyes are on oil markets as traders and analysts alike speculate on how crude prices will respond following last weekend’s Israeli airstrikes on Iranian targets. As I write this column, the main question lingers: will the crude markets react sharply, or could this incident prove to be a minor bump in the road for oil prices?
Despite the potential risks, there is growing sentiment among industry experts that the Israeli strike on Iran may, in the end, have a limited impact on oil prices. If initial reactions are any indication, the market could soon revert to its usual trajectory, with prices gradually trending downward.
A consensus appears to be forming, suggesting that any fear-driven premium in oil prices will likely dissipate. This could lead to stability, with only minor fluctuations along the way.
Last week was a different story. Brent and West Texas Intermediate (WTI) crude futures surged by about four per cent as markets reacted to the looming uncertainty over Israel’s anticipated response to Iran’s missile attack on Oct. 1 and the upcoming U.S. election in November. However, following Israel’s response, oil prices have so far remained steady.
Iran, for its part, downplayed the airstrikes, describing them as causing “limited damage.” Iranian officials stated that Israeli jets had used Iraqi airspace, controlled by the United States, to carry out the attacks, targeting radar installations in the northern and western provinces of Tehran, Ilam, and Khuzestan. Notably, Israel did not use the airspace of Gulf Arab states like Saudi Arabia or the UAE, effectively ruling out any retaliatory response from Iran against those nations.
Saudi Arabia also took a notable step on Saturday by publicly condemning the “military targeting” of Iran. This statement, coupled with Iranian state media reporting that oil production and exports remain “normal,” helped reassure a jittery oil market.
Experts seem to agree that the immediate threat to oil prices has subsided. “The market can breathe a big sigh of relief; the known unknown that was Israel’s eventual response to Iran has been resolved,” noted Harry Tchilinguirian, head of research at Onyx, in a LinkedIn post. He anticipated that the geopolitical risk premium would diminish, with Brent likely returning to the US$74 to US$75 per barrel range.
Bloomberg’s Javier Blas echoed this cautious optimism, pointing to factors expected to maintain stability in the oil markets. He highlighted that Israel, following advice from the U.S., limited its strikes to military targets, steering clear of Iran’s nuclear and oil facilities. This restraint, encouraged by U.S. President Joe Biden, likely played a crucial role in preventing further escalation.
Another stabilizing factor, Blas noted, was Iran’s restrained response. Iranian state media described the strikes as “weak,” signalling a downplayed reaction, perhaps to avoid the need for a major counterattack. Oman, often acting as a diplomatic intermediary between Tehran and Washington, reinforced this narrative, with Oman’s foreign minister stating that the “damage appears limited.”
For now, it appears that both Tel Aviv and Tehran have chosen restraint. However, the situation remains fluid. Should hostilities in Gaza or Lebanon escalate, the conflict could expand, potentially affecting oil markets in ways unseen so far.
Blas’ final thoughts remind us of the ongoing uncertainties: “The situation is fluid, and much depends on how Tehran responds.”
The crude markets may be calm for now, but as with any geopolitical conflict, the potential for disruption looms.
Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. Organizations such as the Department of Energy in Washington and the International Energy Agency in Paris have sought his insights on global energy matters.
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