Oil prices drop as Middle East tensions ease after Israel-Iran standoff

April 22, 2024 (MLN): Oil benchmarks dropped on Monday due to a renewed focus on market fundamentals as Israel and Iran played down the risks of an escalation in the Middle East after Israel's small strike on Iran.

Brent crude traded near $85.83 per barrel, down by 0.64% on the day.

While West Texas Intermediate crude (WTI) was at $81.46 per barrel, down by 0.77% on the day.

"Brent crude prices failed to retain its initial surge, with broad expectations that geopolitical tensions between Israel and Iran may fizzle off given Iran's tamed response," said Yeap Jun Rong, market strategist at IG, as Reuters reported.

"With that, markets continue to unwind the geopolitical risk premium tied to potential supply disruptions, which seems more unlikely at current point in time," he added.

Both benchmarks had spiked more than $3 a barrel early on Friday, after explosions were heard in the Iranian city of Isfahan in what sources described as an Israeli attack, though gains were capped after Tehran played down the incident and said it did not plan to retaliate.

"Higher-than-expected build in US crude inventories did not help matters as well, with near-term price movement seeming more of a supply-side story than demand," Yeap told Reuters.

U.S. crude inventories rose by 2.7 million barrels, Energy Information Administration data showed last week, nearly double analysts' expectations of a 1.4 million barrel rise.

"Economic concerns again become a bearish factor of the crude market," with prices "under pressure due to a large build in the U.S. stockpile and a hawkish Fed that led to a strong dollar," said independent market analyst Tina Teng.

Oil steadied on Friday after prices spiked earlier on reports that Israel had attacked Iran.

Chicago Federal Reserve President Austan Goolsbee on Friday became the latest central banker to signal a longer timeline for interest rate cuts because progress on inflation had "stalled".

On Saturday, the U.S. House of Representatives passed an aid package for Ukraine and Israel containing measures that would let the federal government expand sanctions against Iran and its oil production.

But markets shrugged off the news as the impact of the measures, if passed, would depend on how they are interpreted and implemented. Senate consideration of the bill is set to begin on Tuesday.

For now, ANZ analysts said in a note that volatility in the Middle East will keep oil markets "jittery".

On Saturday, a blast at an Iraqi military base killed a member of a security force that includes Iran-backed groups. The force commander said it was an attack while the army said it was investigating.

Separately, Iran-backed Lebanese group Hezbollah on Sunday said it downed an Israeli drone that was on a combat mission in southern Lebanon.

Israeli forces and Lebanon's armed group Hezbollah have been exchanging fire for over six months in parallel to the Gaza war, fuelling concerns about further escalation.

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