Home » Oil: Brent and WTI jump after Israel’s attack on Iran, then retraces

Oil: Brent and WTI jump after Israel’s attack on Iran, then retraces

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Oil: Brent and WTI jump after Israel’s attack on Iran, then retraces

The news circulating this morning of an attack by Israel against Iran has triggered a sharp initial reaction on the markets, affecting several asset classes, including oil. The Black gold prices shot up, only to then reduce the gains and reverse course during the morning.

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Volatile oil in the morning

Between 4:00 and 5:00 this morning Brent prices temporarily reached 90.75 dollars a barrel and those of WTI have exceeded 86 dollars.

The leap was triggered by rumors of an Israeli attack on the Iranian city of Esfahanwhich has renewed concerns about an extension of the conflict in the Middle East, with possible impacts on crude supplies in an area that accounts for a third of global supply.

The news initially seemed confirmed, but later the same Iranian media downplayed the incidentreassuring the integrity of the Esfahan nuclear plant.

At the moment, the Brent has returned to the $86.6 areawhile the barrel of WTI is trading at 82.5 dollars. Prices remain up by 12% and 15% respectively since the beginning of the year, thanks to OPEC+ supply cuts which have been extended until mid-2024.

The analysts’ view

Second Mps, “the next few days will clarify whether this episode represents the end of history or whether it opens a new phase of the Israel-Iran confrontation”. Analysts report a propensity for the first hypothesis. “What is certain is that these developments have hit risky assets at a time of intrinsic fragility”, due to a “mix of macro and micro factors that are causing the first significant correction since the rally began in late October”.

Per ING, a possible escalation would risk determining “a situation in which i risks of oil supply would lead to effective supply interruptions.”

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According to the experts of Equestria Sim“geopolitical risk is destined to maintain a risk premium on Brent – reasonably between $5 and $10/bbl – in the second quarter of 2024.”

Other data to monitor according to ING

Geopolitical tensions in the Middle East are not the only factor to monitor in the oil market. ING particularly highlights the significant pressure on the ‘crack spread’, or the difference between the price of crude oil and that of distillates. This indicator is trading at its lowest since July 2023, implying a decrease in refining margins for the production of derived petroleum products.

Furthermore, the timespread has moved from a backwardation situation (signaling strong spot demand) to a contango marketsuggesting ample supply in the short term.

Per ING, i fundamentals of middle distillates are weakeningbut supply remains subject to risks, also due to attacks carried out by Ukrainian drones against Russian refineries.

Equita sees Brent oil at $80

Equity highlights how crude oil had so far “absorbed geopolitical events and the return of sanctions on Venezuela by the United States“. Oil exports from Iran, SIM points out, reached a 6-year high of 1.6 million barrels per day in March (out of a total production of 3.2 mbd) and are mainly concentrated towards China . The reason why the possible imposition of more restrictive sanctions by Western countries towards Tehran it could be ineffective and do not change oil fundamentals.”

According to Equita, “the demand for crude oil appears solid and well supplied by growth in production”. Furthermore, OPEC has around 5 million barrels per day of unused production capacity, to be exploited in the event of excessive price increases that would slow down demand.

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“We expect a 2024 crude oil price of around $80/bbl, with an oscillation range of $70-90/bbl. We believe that the price of Brent could gradually fall towards $80/bbl, if the ongoing conflicts do not have implications on the real supply of oil”, concludes Equita.

S&P downgrades Israel, geopolitical risks weigh

Meanwhile, the conflict is weighing on the perception of the State of Israel in financial terms. S&P Global Ratings indeed it has cut the nation’s sovereign debt rating to A+with a negative outlook, awaiting a further review on May 10.

“The recent increase in confrontation with Iran increases the already high geopolitical risks for Israel”, S&P said. A wider regional conflict will likely be avoided, but the war between Israel and Hamas looks set to continue through 2024.

In February Moody’s Investors Service also lowered its rating on Israel to “A2”in the wake of growing fears of tensions in the Middle East.

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