Oil Prices Anticipated to Fall Amidst Israel-Iran Conflict

By Florence Tan and Alex Lawler
SINGAPORE/LONDON (Reuters) – Oil prices are expected to fall when trading resumes on Monday, as Israel's retaliatory strike on Iran over the weekend bypassed Tehran's oil and nuclear infrastructure, avoiding disruption to energy supplies, analysts reported.

Brent and U.S. West Texas Intermediate crude futures gained 4% last week amid volatile trading, driven by uncertainty surrounding Israel's response to the Iranian missile attack on October 1 and the upcoming U.S. elections.

Israeli jets completed three waves of strikes against missile factories and other sites near Tehran and western Iran before dawn on Saturday. This marked the latest escalation in the ongoing conflict between these Middle Eastern rivals.

"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, on LinkedIn. "Israel attacked after U.S. Secretary of State Antony Blinken departed, which is a favorable outcome for the U.S. administration with elections approaching."

Iran downplayed the significance of Israel's air strikes on its military targets on Saturday, claiming the attacks only resulted in limited damage.

"Israel's not attacking oil infrastructure, and reports indicating Iran won’t retaliate have alleviated some uncertainty," said Tony Sycamore, an IG market analyst in Sydney. "It’s very likely we will see a 'buy the rumor, sell the fact' reaction when crude oil futures reopen, possibly bringing WTI back to the $70 per barrel level."

Tchilinguirian anticipates a rapid deflation of the geopolitical risk premium in oil prices, with Brent potentially heading back towards $74-$75 per barrel.

UBS commodity analyst Giovanni Staunovo also forecasts that oil prices will drop on Monday, given that Israel's response to Iran's attack seemed restrained. However, he believes the downside reaction will be temporary, as the market likely did not factor in a significant risk premium.