Oil Prices Plunge Over 1% as Israel-Iran Tensions Ease: Market Focus Shifts to Fundamentals

Oil prices witnessed a significant downturn on Monday, plummeting by more than 1 percent as market dynamics shifted focus towards fundamental factors. This transition followed a notable de-escalation in tensions between Israel and Iran, catalyzed by Israel's apparently minor strike on Iran, which failed to provoke significant alarm. Brent futures, a key benchmark, experienced a decline of $1.21, equivalent to 1.4 percent, settling at $86.08 a barrel by 0655 GMT. Simultaneously, the front-month US West Texas Intermediate (WTI) crude contract for May, slated to expire on Monday, saw a decrease of 97 cents, or 1.2 percent, reaching $82.17 a barrel. The more active June contract also faced a downturn, dropping by $1.23 to reach $80.99 a barrel.

Market strategist Yeap Jun Rong of IG emphasized the failure of Brent crude prices to sustain their initial surge, attributing it to the prevailing expectation of a diminishing geopolitical risk between Israel and Iran due to Iran's restrained response. Yeap remarked, “With that, markets continue to unwind the geopolitical risk premium tied to potential supply disruptions, which seems more unlikely at the current point in time.”

The initial spike in oil prices occurred subsequent to reports of explosions in the Iranian city of Isfahan, which were attributed to an Israeli attack. However, gains were short-lived as Tehran downplayed the incident, indicating a lack of intention to retaliate. Yeap further underscored the role of escalating US crude stocks in exacerbating selling pressure, citing a significant increase of 2.7 million barrels, nearly double the analysts' anticipated rise of 1.4 million barrels.

Independent market analyst Tina Teng echoed similar sentiments, stating, “Economic concerns again become a bearish factor of the crude market,” and elaborated, “prices [are] under pressure due to a large build in the US stockpile and a hawkish Fed that led to a strong dollar,” consequently making oil more expensive for holders of other currencies.

Recent remarks from Chicago Federal Reserve President Austan Goolsbee signaling a prolonged timeline for interest rate adjustments due to stalled progress in curbing inflation further impacted market sentiment. Meanwhile, the passing of an aid package for Ukraine and Israel by the US House of Representatives, which included measures to expand sanctions against Iran and its oil production, failed to significantly sway the market as the impact hinges on the interpretation and implementation of these measures, with Senate deliberations scheduled to commence on Tuesday.

ANZ analysts highlighted the persistent volatility in the Middle East, which continues to keep oil markets on edge. Over the weekend, an explosion at an Iraqi military base resulted in the death of a member of a security force comprising Iran-backed groups, with conflicting reports emerging regarding whether it was an intentional attack or under investigation by the army. Additionally, Hezbollah, a Lebanese group backed by Iran, asserted responsibility for downing an Israeli drone in southern Lebanon, further exacerbating regional tensions amid ongoing skirmishes between Israeli forces and Hezbollah, alongside the protracted conflict in Gaza, raising concerns about the potential for further escalation.

By fLEXI tEAM