Oil Shrugs Off Iranian Assault on Israel as Brent Holds Steady

Oil Shrugs Off Iranian Assault on Israel as Brent Holds Steady

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(Bloomberg) — Oil shrugged off Iran’s unprecedented attack on Israel, with gains held in check by speculation that the conflict would remain contained.

Global benchmark Brent crude initially rose just 0.7% to $91.05 a barrel, before trading flat. More than 300 missiles and drones were fired by Iran at the weekend, the first time it has struck Israel from its soil, though most were intercepted. The attack — which had been expected for days — came in retaliation for a strike in Syria that killed top Iranian military officers.

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“This war may move down the escalation ladder if the Israeli government follows the advice of the White House and forgoes retaliatory action,” RBC Capital Markets analysts including Helima Croft said in a note. While the Iranian action was “far more expansive than previous reprisals, it was still telegraphed in advance,” they said.

Oil has been one of the strongest performers in commodities this year as OPEC+ keeps a tight rein on supply to drain inventories and support prices. The latest attack escalates tensions in a region that produces about a third of the world’s crude, and represents the latest twist in a showdown that’s followed the assault by Tehran-backed Hamas against Israel last October. Still, the Iranian mission to the United Nations said the issue “can be deemed concluded,” reducing for now the risks of a wider conflict.

“The situation is fluid, and if Israel signals it will not retaliate, market tensions will ease,” said Arne Lohmann Rasmussen, head of research at A/S Global Risk Management.

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Shipping risks have also been in focus after Iran seized a vessel, the MSC Aries, near the key Strait of Hormuz waterway shortly before the strikes against Israel. The ship’s beneficial owner is part of Israel-linked Zodiac Group, according to data compiled by Bloomberg. The move raises concerns over the safety of vessels in the region, adding to previous logistical disruptions.

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“The most feared scenario is the closure of the Strait of Hormuz,” said Global Risk Management’s Rasmussen. “I don’t think Iran will close the strait, but the risks are growing.”

There’s already been a deluge of trading, with around 40,000 lots each of Brent and WTI trading by the session’s first hour — a more-than-usual amount. Over 2,000 lots of $95 June call options for Brent, which profit when prices gain, have also been traded in that time. Bullish oil call options are still trading at premiums over the opposite puts.

Oil markets have tightened significantly in recent months, lifting energy costs and posing a headache for central bankers as they seek to drive home their push to quell inflation. Ahead of Tehran’s weekend strike, crude analysts had already been addressing the possibility that prices could once again hit $100 a barrel.

OPEC — the producers’ cartel that counts Iran as a founding member — said last week that oil would need to be closely watched in the coming months to ensure “a sound and sustainable market balance,” according to a monthly report. There’s signs demand is ramping up. US refiners are preparing to boost fuel production for the summer driving season, while recent macroeconomic prints from China have suggested the economy may be turning the corner.

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Money managers have become increasingly bullish on oil as Middle East risks build, with hedge funds’ net-long positions on the global benchmark now at the highest since 2021. Similar positioning for US marker WTI has also grown.

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