Oil prices plunged as markets reacted to the latest barrage of targeted airstrikes that Israel launched on Iran. These moves, which had managed to avoid the premises of critical oil, began to allay fears that supply could be disrupted. Crude prices fell sharply. Accordingly, due to the cautiousness from Israel, which took care to strike only military targets, not major supply disruptions were expected in the market, and accordingly oil prices plunged to their lowest values in 2024.
Key Takeaways:
Oil prices sharply plunged in the wake of Israel's surgically executed attacks that spared key Iranian oil infrastructure, as WTI retreated under $68 and Brent below $72 per barrel.
The contained response from Israel helped to prevent a more serious crisis, thereby saving the market above the late lows by cooling supply disruption fears.
Furthermore, oil prices are facing pressure from broader market factors: decreased demand from China and possible increases in OPEC+ production.
Energy names took a tumble, as sector ETFs fell significantly along with a number of the majors.
Analysts said they expect oil prices to remain under pressure in the absence of further Middle East escalation or broader market dynamics revising lower.
Oil Prices Tumble After Israel's Targeted Strikes
Oil prices tumbled after those airstrikes. WTI crude futures fell almost 6%, trading below $68 per barrel; Brent crude futures fell below $72 per barrel for one of the biggest declines in one day since July 2022. According to analysts, this significant plunge was prompted by the restraint shown by Israel to spare Iran's oil infrastructure.
Skittish over the previous months, the market had been having traders speculate that Israel might attack Iran's oil sector. Brent briefly reached $80 a barrel amid fear of a wider conflict. But as the strikes were confined to military targets, fears of a severe supply disruption receded, enabling the price of oil to settle lower.
According to U.S. President Joe Biden, Israel was admonished not to attack oil or nuclear sites, lest Tehran unleash a far stronger response. Missiles production and air defense sites were hit, with the assault helping to keep energy markets broadly stable.
Analysts Say Oil Prices to Remain Under Pressure
The restrained manner in which Israel has conducted itself has made many analysts say that oil prices are probably set to stay subdued in the near term. Warren Patterson, head of commodity strategy at ING Group, said, "Israel's decision to avoid key energy infrastructure opens the door for de-escalation." He added that any signs of de-escalation could lead to fundamentals dictating the direction of oil prices once again.
Goldman Sachs had earlier said that a sustained disruption to Iranian oil exports could send Brent prices soaring by $10-$20 a barrel. But with no supply disruption imminent, a forecast for Brent crude reaching the mid-$80s does seem a bit unrealistically high. Analysts at Citi cut their fourth-quarter forecast for Brent prices to $70 a barrel from $74 on the back of lower geopolitical risk premiums.
Oil prices have indeed fallen lately, not just because of Middle East tensions, but more due to larger market dynamics: lower demand by China and possible increases in supply by OPEC+. It would appear that a slowing economy in China is translating to reduced oil consumption, with expectations for weak demand in the months ahead. Another factor, according to Pascal Devaux of BNP Paribas, has been the rise of electric vehicles in China, which makes up about 45% of new car registrations in the country.
Meanwhile, OPEC+ has given the green light that it may unwind some of the voluntary production cuts earlier this year. That would add more oil to an already well-supplied market and place additional downward pressure on prices. Already, Capital Economics has foreseen a mix of increased supply and weak demand growth that could push prices lower through the remainder of 2024 and into 2025.
Impact on Energy Stocks
This quicker-than-expected drop in the price of oil has trickled down into energy stocks, with sector ETFs falling and individual company stocks taking a hit. The Energy Select Sector SPDR Fund, which tracks large-cap U.S. energy companies, slipped 2.3% in early trading. Shares in several companies, including APA Corporation, Diamondback Energy, and Marathon Oil, slid between 3% and 4%. Broader sector ETFs, like the SPDR S&P Oil & Gas Exploration & Production ETF, were down 2.8%. The same was true for individual company names like Kosmos Energy and Vital Energy, each sliding 2.8% apiece.
Also shedding 1.7% was the VanEck Oil Services ETF, a tracker of oilfield services firms. Among those badly whacked were ProPetro Holding Corp, lopping about 4% off each of its stock values, Liberty Energy Inc., and Noble Corporation.
Recent events have brought into stark focus what appears to be a near-total linkage between the oil market and developments in the geopolitical arena, particularly insofar as the Middle East is concerned. These strikes, surgical though they were, by Israel have not resulted in the all-out conflict that could have brought on serious consequences. The underlying instability in the region is likely to keep traders edgy, analysts said, even as they remain hopeful that the risk of any immediate supply disruptions has receded. Any further escalation may have a new wave of fears and, thus, probably yet another speculator spike in the price of oil.
U.S. officials are still calling for caution to avoid an action that would make a conflict wider. But in the event of Iran deciding to retaliate with attacks on the shipping lanes or oil production facilities, the market can face renewed volatility. In the meantime, oil prices are likely to remain under pressure, given also prospects for higher output from OPEC+ and weak trends in demand.
Conclusion
Israel's cautious response to the latest attacks on Iran limited further rises in the price, after fears of supply disruption eased. That, however, does little to take the energy market off a state of high alert, broader market dynamics-the OPEC+ production decisions, Chinese demand trends-still drive prices one way or another. Going forward, investors are in close guard for any indication of escalation that would set off supply chains across the globe.
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