Oil Markets and the Latest Near-Miss
An Update: Iran and Israel De-escalate
Oil markets did something unusual this week: following an unprecedented escalation of the Middle East conflict, oil prices (West Texas Intermediate, WTI) actually fell slightly-- to $85.46/bbl by end of day April 15. In fact, oil prices had been falling for the past ten days, from a one-month high of $86.91on April 5.
The outline of the most recent crisis has been well-documented in the news. Following the the Israeli raid on Iran’s consulate in Damascus, which killed several senior IRGC officers, Iran vowed to retaliate against Israel in a proportionate manner. That retaliation took the shape of a massive barrage of drones and missiles launched from Iran against Israel. At the same time, the Iranian leadership made sure to telegraph the unprecedent operation well in advance to Israel and the United States, while at the same time messaging the United States to stay neutral. Israeli air defenses, combined with US,UK, French and Jordanian action managed to down 99% of the projectiles and Israel suffered only minor damage.
Whether out of luck or clever strategic planning, Iran managed to send a well-calibrated message, while at the same time offering an off-ramp to Israel and is allies by stating that no further military action would take place unless Israel responded by taking further action.
The G-7 led by the US condemned Iranian action, as expected. More important from a risk point of view, the same leaders cautioned strongly Israel against any retaliation. In addition, while Prime Minister Netanyahu and his hard-right partners wee seeking a massive response, reasonable voices prevailed. Not only was Israel’s response symbolic, involving a few missiles or drone attacks on an Iranian airbase, but the Tehran response was surprisingly dismissive—case apparently close. Oil prices, which rose to over $85/bbl on the day of the Israeli action, fell by 3% at the close of the week to $83.14. Overall, while wild cards remain, the balance of risks is towards a tamping down of tensions.
In the short-term, oil markets have been reassured that the world has averted a dangerous expansion of the conflict. The United States and other G-7 countries are have added more sanctions on Iran, but these have proven to be ineffective in changing the regime’s behavior. Furthermore, Saudi Arabia and other major oil producers have about 5 millions of barrels per day of excess capacity, and could easily ramp up production if Iranian oil supplies are curtailed. Overall, oil markets have exhibited considerable resilience and the fundamentals of the oil markets have not changed.