Oil prices experienced a slight decline on Tuesday after surging over 4% in the previous session. Traders remained cautious amid ongoing military clashes between Israel and the Palestinian group Hamas, concerned about potential supply disruptions. Brent crude slipped by 36 cents to $87.79 a barrel, while U.S. West Texas Intermediate (WTI) crude dipped 35 cents to $86.03 a barrel. Both benchmarks had earlier fallen by over $1 before recovering slightly.
Monday saw Brent and WTI surge more than $3.50 due to fears that the conflict might extend beyond Gaza and disrupt the oil-rich region. While Israel has limited oil production, the market worried that an escalation could harm Middle East supply and exacerbate an expected deficit for the year.
Analysts at ING noted, “There is still plenty of uncertainty across markets following the attacks in Israel over the weekend,” adding that oil markets are now factoring in a risk premium. If reports of Iran’s involvement prove true, this could further boost prices as tighter U.S. enforcement of oil sanctions against Iran becomes likely, exacerbating an already tight market.
Israel’s Ashkelon port and oil terminal have been shut following the conflict. Although the U.S. lacks direct evidence of Iran’s participation in the attacks, a White House spokesperson suggested Iran’s complicity. If the U.S. does find evidence directly implicating Iran, it could lead to an immediate reduction in Iran’s oil exports, according to analysts.
Vivek Dhar, an energy analyst at CBA, stated, “We continue to believe that Brent oil will ultimately stabilize between $90-$100/bbl in Q4 2023.” However, he added that the Palestine-Israel conflict raises the risk of Brent futures surging to $100/bbl and above.
On a more positive note for supply, Venezuela and the U.S. have made progress in talks that could provide sanctions relief to Caracas by allowing at least one additional foreign oil firm to purchase Venezuelan crude oil under certain conditions.
