Brent sheds as market absorbs geopolitical risk premium

The front-month ICE Brent contract lost $0.88/bbl on the day from Friday, to trade at $89.65/bbl at 09.00 GMT.

PHOTO: Crude oil pump jacks. Getty Images

Upward pressure:

Brent futures gained upward support after Iran launched more than 300 drones and missiles on Israel on Saturday.

This news has triggered fresh concerns about a potential supply shortage in the global oil market, as analysts anticipate that Israel could retaliate against Iran and damage its energy facilities. On a monthly average basis, Iran produced more than 3 million b/d of crude oil during January-March, according to OPEC’s oil market report.

“This [Iran's attack on Israel] marks an escalation in tension that is likely to raise concerns of a possible disruption to supply,” said Daniel Hynes, senior commodity strategist at ANZ Bank. “The extent of that risk will likely be determined by the reaction of Israel’s government,” he added.

US President Joe Biden and other world leaders have strongly criticised Iran’s action.

Supply risks also include stricter US sanctions against Iranian oil, “which could see anywhere between 500,000 – 1 million b/d of oil supply lost,” said two analysts from ING Bank. “This would ensure that the oil market remains in deficit for the remainder of the year,” they added.

Downward pressure:

Brent futures lost momentum this morning after the global oil market absorbed the ramifications of Iran’s air strikes on Israel over the weekend.

Oil market analysts had anticipated this move by Iran. However, they believe that a more significant surge in oil prices could be seen if the conflict causes any tangible disruption to supply, for instance, any further escalation in the Red Sea and the Strait of Hormuz.

Israeli Prime Minister Benjamin Netanyahu’s cabinet and the Israeli Defense Forces (IDF) have not responded to Saturday’s attacks yet.

“Fear” has driven prices up, rather than actual supply disruptions, argued Saxo Bank’s APAC strategy team. “Crude prices already included a risk premium and the extent to which it will widen further depends almost exclusively on developments near Iran around the Strait of Hormuz,” they added.

By Aparupa Mazumder

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