Oil prices declined on Monday after last week’s sharpest weekly increase in over a year. Concerns about oversupply and weaker demand offset fears that a broader Middle East conflict could hinder exports from the main producing region.
By 04:35 GMT, Brent crude futures had dropped 31 cents, or 0.4%, to $77.74 per barrel. At $74.18 a barrel, U.S. West Texas Intermediate crude futures fell 20 cents, or 0.27%.
The WTI contract gained 9.1% week over week, marking the highest increase since March 2023. Brent rose by nearly 8% last week, the largest weekly gain since January 2023. This was due to anticipation that Israel could target Iranian oil infrastructure in retaliation for an Iranian missile attack on Israel on October 1.
But some investors probably sold futures to lock in their gains from the previous week’s surge, as the Israeli response is still evolving.
Regarding Monday’s decline in oil prices, “technical profit-taking seems to be the most logical explanation,” according to Priyanka Sachdeva, senior market analyst at Phillip Nova.
Growing demand-side pressures have been offset by the possibility of mass-scale Middle East violence. However, Sachdeva says worries over Israel’s response to Iran mean oil markets will inevitably face headwinds.
Ahead of the one-year anniversary of Hamas’s Oct. 7 strikes on Israel, which triggered the ongoing conflict, Israel struck Hezbollah sites in Lebanon. On Sunday, Israel also launched attacks on the Gaza Strip. Its minister of defense added that there was no limit to how it may respond to Iran.
Iran attacked Israel with missiles last week in retaliation for Israel’s recent attacks on Hezbollah in Lebanon and its protracted incursion into Gaza against Hamas after its attack on October 7.
ANZ Research issued a warning on Monday, stating that even with the previous week’s surge in oil prices, the conflict’s effect on the world’s oil supply will be minimal.
“We see a direct attack on Iran’s oil facilities as the least likely response among Israel’s options,” it stated.
“Moreover, we have seen a diminished impact of geopolitical events on oil supply. This has led to a significantly smaller geopolitical risk premium being applied to oil markets in recent years, and OPEC’s 7 million barrels per day of spare capacity provides a further buffer.”
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, notably Russia and Kazakhstan, have millions of barrels of spare capacity. They have reduced output in recent years to sustain prices amid poor global demand.
Analysts say the producer grouping would struggle if Iran retaliated by attacking the installations of its Gulf neighbors. However, it has enough spare oil capacity to compensate for a complete loss of Iranian supplies if Israel destroys that nation’s infrastructure.
OPEC+ maintained its oil output policy at its most recent meeting on October 2, which included a plan to begin increasing production in December.
According to Sachdeva of Phillip Nova, the output increase may readily protect the market from supply interruptions. It continues to limit the upside in oil prices, especially given the uncertain pace of economic recovery in China, the world’s largest crude importer.
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