Oil prices fell at Asia’s open on Monday, as market participants dialed back risk premiums following Iran’s attack on Israel late on Saturday which the Israeli government said caused limited damage.
The attack involving more than 300 missiles and drones was the first on Israel from another country in more than three decades. It had raised concerns about a broader regional conflict affecting oil traffic through the Middle East.
But the attack, which Iran called retaliation for an air strike on its Damascus consulate, caused only modest damage, with missiles shot down by Israel’s Iron Dome defense system. Israel, which is at war with Iran-backed Hamas militants in Gaza, has neither confirmed nor denied it struck the consulate.
While Israeli officials said the country’s war cabinet was in favor of retaliation, the U.S. said it would not take part in any offensive against Iran. Global powers, other Arab nations and the UN secretary general have issued calls for restraint.
“The Iranian retaliatory missile and drone attack on Israel yesterday morning appears sufficient in size to revenge the killing of Iranian military personnel in Syria without being damaging enough to trigger a further escalation in hostilities at this point,” IG market analyst Tony Sycamore said in a client note.
Oil benchmarks had risen on Friday in anticipation of a retaliatory attack by Iran, touching their highest levels since October.
But prices still ended the week down about 1% after the International Energy Agency lowered its forecast for oil demand growth this year.
Despite the limited damage sustained by Israel, analysts were widely expecting at least a short-lived rally in prices this morning.
The attack marks an “unprecedented and dangerous development in an already volatile region,” said Rystad Energy Senior Vice President Jorge Leon.
Analysts said more significant and longer-lasting price effects from the escalation would require a material disruption to supply, such as constraints on shipping in the Strait of Hormuz near Iran.
So far, the Israel-Hamas conflict has had little tangible impact on oil supply.
A “less certain path to Fed rate cuts” because of persistent U.S. inflation also weighed on prices, Sycamore said. “However, in the medium term, ongoing geopolitical instability in the Middle East and Europe means that all the risks remain to the topside in crude oil towards $90.”
