Oil Falls Below $88 After Middle East Tension Escalates

Oil Falls Below $88 After Middle East Tension Escalates

The global prices of crude oil slid on Tuesday as Middle East tension reduced the demand outlook to a level that neutralised the impacts of the oil group’s tight supply – in the short term.

The international benchmark crude Brent traded at $87.36 per barrel, representing a 0.89% decline from the closing price of $88.15 a barrel in the previous trading session on Monday. The American benchmark West Texas Intermediate (WTI) traded at the same time at $85.56 per barrel, down 0.95% from Monday’s close of $86.38 per barrel.

Both benchmarks recorded steep increases on Monday, with Brent rising over 5% as markets priced in geopolitical risks after the eruption of the military crisis between Israel and Palestine.

The market has started gauging the role that Iran played in the Israel-Gaza imbroglio. Iran’s potential involvement could also raise the risk of additional sanctions being placed on its oil industry.

Iran, with the world’s fourth-largest oil reserves, is also the third-largest producer among OPEC members, but its exports have been under strict US sanctions for a long time due to its non-compliance with the 2015 nuclear deal signed between Iran, the US, China, Russia, France, the UK, Germany and the EU.

If the embargo on Iran’s oil exports and financial sector is lifted, Iran will be able to export oil again, bringing much-needed barrels to the market. Iran may have helped plan the attacks, but any broadening of the conflict could see a significant level of supply come under threat, analysts said.

Oil prices will likely remain very sensitive to events in Israel and Gaza, not to mention how other countries in the Middle East respond to the attacks, OANDA analyst Craig Erlam said in a note. Naira Devaluation Deepens Economic Crisis in Nigeria

“Iran has been accused of assisting in the attack which it denied while supporting those that carried it out. With many other major oil-producing nations in the region, traders will be on high alert for any escalation and what the knock-on effects will be”, Erlam said.

 Brent crude has partially pared its gains at the start of the week but remains around 4% above Friday’s close so traders are clearly anxious.  Price action will likely remain volatile over the coming days due to the risk of significant escalation.

Brent remains more than 7% from the highs a couple of weeks ago and it will be interesting to see whether this gap closes further after the sharp correction that followed those highs.